Louis Proyect: The Unrepentant Marxist

September 8, 2011

Bourgeois pundits ponder Marx

Filed under: economics,financial crisis,socialism — louisproyect @ 7:08 pm

Over the past few months there has been a bumper crop of articles in elite publications such as the Financial Times making the case that Karl Marx was right—or mostly right. This is understandable given the perilous times we are living through. The kind of Panglossian message found in Fukuyama’s End of History is ill-suited to a world edged on the precipice of economic ruin, largely beyond the capability of the world bourgeoisie to resolve.

Nouriel Roubini

The first to weigh in was Nouriel Roubini who was interviewed by the WSJ on August 11th. Roubini, whose bearishness generally makes him open to Marx’s pessimistic take on the long-term outlook of capitalism, must have shocked the Journal with his nod to their bête noire:

WSJ: So you painted a bleak picture of sub-par economic growth going forward, with an increased risk of another recession in the near future. That sounds awful. What can government and what can businesses do to help get the economy going again or is it just sit and wait and live it out?

Roubini: Businesses are not doing anything. They’re not actually helping. All this risk made them more nervous. There’s a value in waiting. They claim they’re doing cutbacks because there’s excess capacity and not adding workers because there’s not enough final demand, but there’s a paradox, a Catch-22. If you’re not hiring workers, there’s not enough labor income, enough consumer confidence, not enough consumption, not enough final demand. In the last two or three years, we’ve actually had a worsening because we’ve had a massive redistribution of income from labor to capital, from wages to profits, and the inequality of income has increased and the marginal propensity to spend of a household is greater than the marginal propensity of a firm because they have a greater marginal propensity to save, that is firms compared to households. So the redistribution of income and wealth makes the problem of inadequate aggregate demand even worse.

Karl Marx had it right. At some point, Capitalism can self-destroy itself because you cannot keep on shifting income from labor to Capital without having an excess capacity and a lack of aggregate demand. That’s what has happened. We thought that markets worked. They’re not working. The individual can be rational. The firm, to survive and thrive, can push labor costs more and more down, but labor costs are someone else’s income and consumption. That’s why it’s a self-destructive process.

I am not sure how schooled Roubini is in Marxism, but essentially he is laying out an underconsumptionist analysis which is not quite what Marx put forward. I deal at some length with the theory here: https://louisproyect.wordpress.com/2008/02/23/a-laypersons-guide-to-crisis-theory/

I would only say at this point that any argument made for an open assault on the privileges of the rich is most welcome, but that in itself is no guarantee that the economy will revive. Basically, underconsumptionism addresses how the pie is divided but not how it expands. The grim reality facing bourgeois economists is the likelihood that such expansion is precluded on the basis of how the global capitalist system is structured now. The exceptional growth in the American economy from 1945 to 1970 or so was directly related to its commanding position as the major victor in WWII. Those days are over.

Samuel Brittain

The next to weigh in was Samuel Brittain, who penned “Mistaken Marxist Moments” in the August 25th Financial Times (the only way to read the article if you are not subbed to the FT is to google “mistaken Marxist moments” and then click the link that comes up there.) Unlike Roubini, Brittain is a pretty reactionary slug, having studied with Milton Friedman at Cambridge and defending Margaret Thatcher’s policies against 364 leading economists who had written an open letter in the London Times.

Despite his rightwing politics, Brittain allows that some kind of deficit spending might be necessary. You’ll note that he like Roubini accepts some of the precepts of underconsumptionism:

What did Marx mean by the contradictions of capitalism? Basically, that the system produced an ever-expanding flow of goods and services, which an impoverished proletarianised population could not afford to buy. [emphasis added] Some 20 years ago, following the crumbling of the Soviet system, this would have seemed outmoded. But it needs another look, following the increase in the concentration of wealth and income. Indeed, a former chief economist of the International Monetary Fund, Raghuram Rajan, has attributed the recent credit explosion partly to real wage stagnation, which encouraged people to borrow.

But even if the analysis is right, the remedy is wrong. The justification for redistribution is ethical. If the only thing wrong with capitalism is insufficient mass purchasing power then surely the remedy is the helicopter drop of money envisaged by Milton Friedman. For this we need not so much a political as an intellectual revolution, namely the overthrow of the balanced budget fetish.

The fact that a Thatcherite can call for the “overthrow of the balanced budget fetish” shows how deep the crisis is, even if this kind of heresy has not reached the Republican Party in the U.S. which has become more and more like a suicidal cult. With respect to the “helicopter drop”, this is essentially what Bush and Obama have done since 2008, largely to no avail. Perhaps the economy would have been worse off without an injection of liquidity but that’s of little consolation to people who have had their homes foreclosed or lost their jobs. People expect an expanding economy and deficit spending will likely fail to accomplish this.

George Magnus

Three days after Brittain’s article appeared, George Magnus proposed that we “Give Karl Marx a Chance to Save the World Economy” on Bloomberg.com, the voice of NYC’s billionaire mayor.  Considering the fact that Magnus is the Senior Economic Adviser to UBS Investment Bank, we’re talking about a major loss of confidence among the elite. Like the two aforementioned experts, Magnus adduces an underconsumptionist message to Marx that is really not there:

Marx also pointed out the paradox of over-production and under-consumption: The more people are relegated to poverty, the less they will be able to consume all the goods and services companies produce. When one company cuts costs to boost earnings, it’s smart, but when they all do, they undermine the income formation and effective demand on which they rely for revenues and profits.

This problem, too, is evident in today’s developed world. We have a substantial capacity to produce, but in the middle- and lower-income cohorts, we find widespread financial insecurity and low consumption rates. The result is visible in the U.S., where new housing construction and automobile sales remain about 75% and 30% below their 2006 peaks, respectively.

As Marx put it in Kapital: “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.”

Unfortunately Magnus omitted the conclusion of Marx’s sentence, which reads in full: “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.”

That is something that bourgeois economists can’t seem to get their head around. It is not just that the masses lack consumption power; it is that the “revolutionization” of the means of production continues to replace living labor with dead labor to the point that more and more workers either become unemployed or underemployed. That is a dilemma that no amount of “helicopter drops of money” can solve.

Derek Thompson

You can get an admission that the problem exists in another mainstream publication, the Atlantic Monthly. In a highly revealing article titled “The Greater Recession: America Suffers from a Crisis of Productivity“,  senior editor Derek Thompson states:

Americans have a complicated relationship with productivity. We obsess about our personal efficiency, but we don’t think much about efficiency across broad swaths of the economy. Productivity is the not-so-secret sauce in our GDP. We’re the second-largest manufacturer in the world even though manufacturing jobs have shrunk to less than 10 percent of our economy. We’re the world’s third-largest agricultural nation even though only 2 percent of us farm. The reason we can do so much work with so little is that the U.S. economy is incredibly, and increasingly, efficient at making some things cheaply.

Don’t ask David Allen to explain this. Ask David Autor. He’s the MIT economist who, in last month’s cover story, “Can the Middle Class Be Saved?”, told Don Peck that technology and offshoring is replacing jobs for the middle-educated middle-class. “Almost one of every 12 white-collar jobs in sales, administrative support, and nonmanagerial office work vanished in the first two years of the recession,” Peck writes, and one in six blue-collar jobs disappeared in production, craft, repair, and machine operation.

We know where the jobs are going — to machines, software, and foreign workers. We also know why they’re going away. Global competition gives companies the incentive to be more productive, and technology and foreign labor gives companies the means to be more productive. Automation lets one employee handle the work of three, or three hundred. Off-shoring lets ten Asian workers receive the salary of one. As these corporate Getting-Things-Done strategies make the typical worker increasingly expendable, real wages have stagnated, or declined, to their 1950s levels.

Capitalist apologists have always maintained that breakthroughs in technology such as the automobile create new jobs. Blacksmiths might be eliminated, but jobs at Ford will open up. That, at least, is what they taught us in high school. Like much else that we learned there, it is simplistic. Oddly enough, Derek Thompson seems to have a better handle on what Marx stood for without giving him the credit that the other pundits do.

John Gray

Moving right along, there’s John Gray who penned “A Point of View: The revolution of capitalism” for the BBC New Magazine on September 3rd. Despite the article’s title, Gray gives his props to Marx as well as acknowledging the inability of the system to “deliver the goods” that bourgeois politicians promise us:

Marx was wrong about communism. Where he was prophetically right was in his grasp of the revolution of capitalism. It’s not just capitalism’s endemic instability that he understood, though in this regard he was far more perceptive than most economists in his day and ours.

More profoundly, Marx understood how capitalism destroys its own social base – the middle-class way of life. The Marxist terminology of bourgeois and proletarian has an archaic ring.

But when he argued that capitalism would plunge the middle classes into something like the precarious existence of the hard-pressed workers of his time, Marx anticipated a change in the way we live that we’re only now struggling to cope with…

Fulfilling careers will no longer be the prerogative of a few. No more will people struggle from month to month to live on an insecure wage. Protected by savings, a house they own and a decent pension, they will be able to plan their lives without fear. With the growth of democracy and the spread of wealth, no-one need be shut out from the bourgeois life. Everybody can be middle class.

In fact, in Britain, the US and many other developed countries over the past 20 or 30 years, the opposite has been happening. Job security doesn’t exist, the trades and professions of the past have largely gone and life-long careers are barely memories.


Unlike those who see a light at the end of the tunnel, Gray only sees an oncoming train. A deeply pessimistic thinker, he rejects Marx’s socialism as a solution to the world’s problems and instead adopts a kind of Millenarian gloom but without the theological underpinnings. Throughout his writings, there is a rejection of the idea of progress, either one based on the Fukuyaman appropriation of Hegel or anything that Marx ever wrote. More recently he has become a partisan of James Lovelock’s Gaia hypothesis and accepts with an alarming degree of equanimity that the human race faces extinction. This is not exactly the kind of person we need defending Karl Marx, to say the least.

Umair Haque

Finally, we come to the Harvard Business Review, ostensibly the last bastion of capitalist ideology. There we find Umair Haque, the Director of the Havas Media Lab and author of The New Capitalist Manifesto: Building a Disruptively Better Business, asking the question “Was Marx Right?” After presenting in a somewhat oversimplified but fairly accurate manner some of Marx’s major concepts (alienation, commodity fetishism, false consciousness), Haque states:

Marx’s critiques seem, today, more resonant than we might have guessed. Now, here’s what I’m not suggesting: that Marx’s prescriptions (you know the score: overthrow, communalize, high-five, live happily ever after) for what to do about the maladies above were desirable, good, or just. History, I’d argue, suggests they were anything but. Yet nothing’s black or white — and while Marx’s prescriptions were poor, perhaps, if we’re prepared to think subtly, it’s worthwhile separating his diagnoses from them.

Because the truth might just be that the global economy is in historic, generational trouble, plagued by problems the orthodoxy didn’t expect, didn’t see coming, and doesn’t quite know what to do with. Hence, it might just be that if we’re going to turn this crisis upside down, we’re going to have to think outside the big-box store, the McMansion, the dead-end McJob, the bailout, the super-bonus, and the share price.

The future of plenitude probably won’t be Marxian — but it won’t look like the present. And if we’re going to trace the beginnings of better, more enduring, more authentic, more meaningful, fundamentally more humane paradigm for prosperity, perhaps it’s worthwhile exploring — even when we don’t agree with them — the critiques and prophecies of those who already challenged yesterday’s.

I doubt that Haque has read any recent Marxist literature but the idea that there is a spirit of “overthrow, communalize, high-five, live happily ever after” anywhere except perhaps the Spartacist League is pretty laughable. Marxism, ever since its inception, has been a philosophy that seeks to relentlessly criticize everything that exists. For those who equate the USSR with Marxism, that might come as a surprise. At any rate, it is of some interest that kudos for Karl Marx can be found in the enemy camp even if they are misguided. We are apparently reaching a point in history that Karl Marx described in “The Communist Manifesto”:

Finally, in times when the class struggle nears the decisive hour, the progress of dissolution going on within the ruling class, in fact within the whole range of old society, assumes such a violent, glaring character, that a small section of the ruling class cuts itself adrift, and joins the revolutionary class, the class that holds the future in its hands. Just as, therefore, at an earlier period, a section of the nobility went over to the bourgeoisie, so now a portion of the bourgeoisie goes over to the proletariat, and in particular, a portion of the bourgeois ideologists, who have raised themselves to the level of comprehending theoretically the historical movement as a whole.


  1. Great article Louis! I had noticed myself the acknowledgement of Marx’s specter in the bourgeois press, specifically the Roubini and John Gray pieces. Thanks for the wider view.

    Comment by Dialectic Sines — September 8, 2011 @ 8:05 pm

  2. A quite masterly summary which I can hardly falter; it all seems so simple in reality, to us – but, of course, it REALLY comes down to the class struggle, though unfortunately the vast majority of the western populace regard this as a “pornographic figment of the imagination of perverts” …. The elite just cannot take the appropriate action because WITHOUT action, the crisis may well get worse, but the transfer of power to THEIR class and the dis-empowerment of the masses both increase. It MUST remind is of aphorisms of Rosa Luxembourg on this contradiction.

    Nevertheless the successes of revolutionary activities across the world continue – surely the masses of the west must follow soon (and not just steal trainers and iPods) …. I have been today to my monthly “Munch and Mardle” (Mardle is Norfolk dialect for conversation; Munch probably needs no explanation – but it is a lovely monthly lunch for oldsters produced by volunteers in the village hall) and Ken (the old farm worker) next to me said these characters in Basildon want to spend £18 million chucking out a number of “travelling families” – Irish or Romany) from property they own at Dale Farm – what;s wrong with their brains? This “problem” of the Roma and the travellers seems likely to dominate the news from Britain if the Council really try eviction as they propose on 19th/20th of this month.

    [If they do ‘tum them out – they will be legally responsible for the welfare of all these families – which will cost ’em even more – put them in hotels ? – or do they want to build more prisons ? It reminds one of the aphorism “Those whom the Gods wish to destroy – they first make mad.”

    —— a bit of local comment from East Anglia, which I apologise for – but the aphorism seems to apply to the WHOLE of the US/UK(and Europe – he ruling class (or elite – which seems to be the new mealy-mouthed description of the buggers). are really fighting the class struggle – and they MEAN IT – the bastards…….

    Why is everyone else so slow to learn? Or perhaps they really DO understand but still feel helpless – after 20 or 40 years of defeat.

    Comment by Paddy Apling — September 8, 2011 @ 8:28 pm

  3. Finally, in times when the class struggle nears the decisive hour, the progress of dissolution going on within the ruling class, in fact within the whole range of old society, assumes such a violent, glaring character, that a small section of the ruling class cuts itself adrift, and joins the revolutionary class, the class that holds the future in its hands. Just as, therefore, at an earlier period, a section of the nobility went over to the bourgeoisie, so now a portion of the bourgeoisie goes over to the proletariat, and in particular, a portion of the bourgeois ideologists, who have raised themselves to the level of comprehending theoretically the historical movement as a whole.

    Huh. Which one of these worthies has joined the revolutionary class?

    Comment by ken — September 8, 2011 @ 10:30 pm

  4. Huh. Which one of these worthies has joined the revolutionary class?

    None of them, but–trust me–when the American working class begins to move in a massive and decisive fashion, you will see defections from bourgeoisie. Not necessarily these guys, but any number of academics, journalists, etc. It happened in the 1930s and 60s and it will happen again.

    Comment by louisproyect — September 8, 2011 @ 10:36 pm

  5. A pretty good summary, including a few that hadn’t gotten notice in my neck of the leftist wilderness.

    This is only the beginning of waverings among the bourgeois intelligentsia. That they can come up with nothing but Marx to explain the present reality, even in the absence of a strong working class movement, is a measure of their own bankruptcy.

    Another one to add to the list would be the Keynesian liberal Brad DeLong: http://delong.typepad.com/ Brad provides an excellent window on the crisis of bourgeois economics. He’s too disciplined to pen such odes to Marx, and that is in part also because like the rest, he misapprehends Marx, but he has some sense of his own professional integrity, and therefore tries to take Marx seriously. For someone who admires in particular Marx’s historical sensibility, Brad nevertheless cannot understand that what exercises him the most – the baffling “failure of policy”, has this as its equivalent: “At a certain stage of their development, the material productive forces of society come in conflict with the existing relations of production, or — what is but a legal expression for the same thing — with the property relations within which they have been at work hitherto. From forms of development of the productive forces these relations turn into their fetters. Then begins an epoch of social revolution.” This single statement from the “Preface of A Contribution to the Critique of Political Economy” explains in a nutshell the entirety of the present political situation, with its dreary pall of doom without hope of escape.

    The common theoretical problem with all of the above is, of course, that they are Monetarists, adherents to the Quantity Theory of Money, a theory first promulgated in the 18th century by David Hume. They can’t see that “helicopter drops” of money to the working class won’t alter the *value* relation between capitalists and workers, and that the money-tokens will just end up back in the pockets of the former, reflecting that unchanged relation.

    Comment by Matt — September 9, 2011 @ 1:36 am

  6. Fantastic article. Very relevant too as the president just got on TV announcing more helicopter drops of money.

    (Really do wish you would stick to such analysis instead of trolling the comments section of other left blogs… credit, where credit is due however)

    Comment by beesat — September 9, 2011 @ 1:59 am

  7. I don’t “troll” other blogs. My comments on Richard’s blog were unusual for me and only prompted by my passionate feelings about Libya. Except for the dozen or so comments I left there, I doubt if I have posted a single comment this year there. Same thing for Socialist Unity.

    Comment by louisproyect — September 9, 2011 @ 2:08 am

  8. We live in the age of youtube and animation. Someone savvy should be able to animate very easily how the rise in productivity creates this contradictory crisis that it can’t get out of using some simple analogies.

    Kind of like David Harvey’s RSA thing, but doesn’t even need to be as long winded and complex.

    Simplify the world to competing companies producing oranges (or something) and show how as they produce more and more oranges with less and less workers, how the whole thing comes crashing down.

    Comment by beesat — September 9, 2011 @ 2:14 am

  9. so where does the ‘tendency of the rate of profit to fall” fit in this?

    Comment by beesat — September 9, 2011 @ 2:24 am

  10. BTW, it is interesting to compare the near total blockage of bourgeois “progressive reform” under present-day capitalism with the situation of over 100 years ago, here described in yet another mainstream capitalist format, Bloomberg:

    Webb, Churchill and the Birth of the Welfare State: Sylvia Nasar


    ‘Hooting Howling Mob’

    “An electrifying surge of violence in London dispelled her suicidal mood. On Feb. 8, 1886, 10,000 unemployed workmen and thousands of radicals rallied peacefully in Trafalgar Square, surrounded by 2,500 police. When the demonstrators poured into the main streets, they began “cursing the authorities, attacking shops, sacking saloons, getting drunk, and smashing windows,” according to a newspaper account. The police were unprepared and grossly outnumbered. For hours, a “hooting howling mob” ruled the West End.

    “Queen Victoria’s charge that the episode constituted “a momentary triumph for socialism” was hyperbolic, but the eruption of anger stimulated a revival of middle-class activism. It ultimately led Beatrice to try her hand at investigative journalism. “Social questions are the vital questions of today,” she wrote. “They take the place of religion.”

    “She decided to go undercover to share the experiences of sweatshop workers. To prepare for the role, she plowed through piles of “Blue Books, pamphlets and periodicals bearing on the subject of sweating.” She moved to a shabby East End hotel, and spent eight to 12 hours a day learning how to sew at a cooperative tailoring workshop only to flit off to fashionable West End dinner parties at night.

    “When she felt prepared, she dressed in dingy clothes and set off on foot to find a job. Within 24 hours, Beatrice was sitting with a dozen other women at a large table making a mess of sewing buttons on pairs of trousers. Her eyes hurt, her back ached and she found the heat from the gas lamps stifling. When a shrill voice finally cried out, “Eight o’clock by the Brewery clock,” she received a shilling, the first money she had ever earned. And when “Pages of a Workgirl’s Diary” was published in a liberal journal, its success and the newspaper coverage of her escapade were delicious.

    “Beatrice was a 32-year-old spinster when Sidney Webb, the brainy son of a London hairdresser, proposed they write a book on labor unions together. She knew that Webb was the intellect behind a coterie of young men who were manipulating the mainstream parties “to voice a growing desire for state action.” The Fabians, as they were known, called themselves socialists, but they wished to tame the “Frankenstein” of free enterprise rather than kill it, and to tax the rich rather than wipe them out.”

    The reference to Marx in the article is of course ignorant.

    The Birmingham screw manufacturer and “radical liberal” demagogue Joseph Chamberlain was later a key player in tying the chauvinist petite-bourgeois layer of the British working class to the “New Imperialism”. Chamberlain was probably the most important bourgeois politician in his time, and was a key influence in Churchill’s decision to jump ship “in the other direction” into the Liberal party. Sound familiar?

    Comment by Matt — September 9, 2011 @ 4:13 am

  11. I nearly choked when I first read John Gray’s “A Point of View: The revolution of capitalism.” It has so many layers of misunderstood concepts, misunderstood terminology, and outright falsehoods woven together with so many logical fallacies that it would take a very long time to correct it.

    It honesty appears as though he’s skim-read the wikipedia article on Marxism and cobbled it together with his own bizarre views.

    Comment by Patrick Smith — September 9, 2011 @ 9:25 am

  12. #1 There is definitely a spectre hauting these guys.

    They are all dyed in the wool monetarists i.e. they believe passionately in tight controls on the ability of the state to create money. They believe that only the private sector should be trused with that because it is blessed with `englightened self-interest’. Of course in reality by handing over money supply to the private banks they’ve embroiled us all in a world-historic super duper ponzi scheme. These people couldn’t be trusted with their granny’s savings let alone a nation’s finances. They cannot understand how the bankers have betrayed their beloved theories and are fumbling back towards state backed Keynesianism. They want more QE to pay out all those super rich schmuks who bought Wall Street bonds and if they have to frighten the horses with talk of Marx to get it they will. But of course Marx never fell for that ludicrous notion that the problem with capitalism is underconsumption as they well know and that is the bit they of course reject. They can take the mis read Keynesianism now that it benefits the super rich but they cannot take the idea that there is an objective limit to an ever growing capitalist system.

    Comment by David Ellis — September 9, 2011 @ 12:38 pm

  13. It goes to show that if these stuffed shirt type, bourgeois Wall Street pundits even mention Marx’s name, the economic situation in America is extremely bad.

    Marx’s predictions dating back to 1848 have become a reality for proletariat America.

    I believe what will be next is a shift to a socialist system here as Marx forecasted a socialist intermediate stage between capitalism and communism.

    I don’t believe that capitalism will just run out of gas and burn out on its own.

    I think the weakening of capitalism will just help to strengthen the revolutionary cause to overthrow the current system and transitional steps to a proletariat and eventual classless state.

    Twenty five million people in America are unemployed and these are just estimates as the number is likely much higher.

    Thirty nine million are estimated to be living in poverty.

    There is much strength in numbers. A future uprising of the oppressed social classes is inevitable.

    Comment by Deborah Jeffries — September 9, 2011 @ 4:26 pm

  14. Here’s another one from Sylvia Nasar on Bloomberg. Apparently Nasar has made it her special duty to jog the historical memory of our senescent bourgeoisie. Good luck with that: haven’t you heard Ms. Nasar, history is either bunk, or at an end! of course her picture of a prescient Schumpeter or Keynes is a gloss – both of these shifted their positions considerably over the course of their careers.

    Keynes, Schumpeter and the Great Post-War Mistake

    In January 1919, as the Allied leaders met in Paris to hammer out a treaty ending World War I, famine and pestilence raged from St. Petersburg to Istanbul. To the Britons and Americans who came to survey the damage, the whole continent seemed to be in extremis.

    Eight weeks after the signing of the armistice, peace had not been restored. The Allied blockade was still in effect. Dozens of small wars erupted, involving hundreds of thousands of troops. Entire populations were being terrorized by pogroms and expulsions. Eight and a half million men had died. Nearly as many were left physically disabled or psychologically maimed. A generation in Central Europe was growing up underfed and undersized — the Kriegskinder, or children of war.

    Victors and losers alike were saddled with massive debts and faced pressure to compensate those who had sacrificed so much. Yet every avenue back to normalcy was blocked. Trade was at a standstill, credit frozen, production stymied by lack of raw materials, the workforce idle. The economic mechanism of Europe had to be unjammed, yet the men in Paris persisted in believing that their nations’ losses could be recouped by extracting reparations and redrawing borders.
    The Wunderkind

    “Starvation means Bolshevism,” a British general warned. The word in Paris was that Vienna, flanked by two Red capitals, would be the next to succumb. In April, thousands of gaunt and ragged men — unemployed factory workers, paid agitators, demobbed soldiers, many with missing limbs — descended on Vienna’s Ringstrasse, setting the Parliament building ablaze and attacking the police. The militia finally restored order, but not before a horse was shot out from under a policeman. As the animal lay dead in the street, a hungry mob tore it to pieces and carried off hunks of bloody meat. For ordinary Viennese, who adored the emperor’s white show horses the way Americans loved boxing champions, the incident was a sign that civilization was reverting inexorably to barbarism.

    While the street battle raged a mile away, the bankrupt government of a dismembered Austrian Republic — surrounded by hostile states, threatened by revolution, awaiting the Allied peace terms being decided in Paris — met in the freezing chancellery. Its youngest member was the new finance minister, Joseph Schumpeter. The urbane, clever, ambitious Wunderkind of the defunct Austro-Hungarian Empire had opposed the war, avoided the draft and advised the now-exiled emperor to make a separate peace with the Allies. A member of the conservative opposition party, Schumpeter had nonetheless leapt at the chance to join a government run by his Marxist university pals, gloomy men who saw no future for Austria other than communism or “Anschluss” — economic and political union with Germany.

    If a nation decides to commit suicide, Schumpeter quipped, a doctor had better be present. But he radiated optimism. Six months after the armistice he had already unveiled a plan for postwar economic recovery. The capitalist welfare state, which he called the “Steuerstaat,” or “tax state,” would survive, he predicted. Any crises would result not from the triumph of socialism, but rather from the tendency of voters’ expectations to race ahead of their willingness to pay taxes. The republic would face constant pressure to run budget deficits and to ease debt burdens by resorting to inflation.
    Schumpeter’s ‘Intrigues’

    He believed that a shrunken Austria had the means to recover. As long as entrepreneurs were allowed to create new enterprises, the financial system was functioning efficiently and there were not too many barriers to trade, society could regenerate itself. He rejected the popular assumption that economic viability depended on vast territories, huge populations and natural resources. Switzerland, whose per-capita income rivaled that of Britain, was no bigger than Scotland. And before the war, Vienna had been the most important center of finance, transportation and trade in Central Europe.

    As long as the Allies or neighboring countries did nothing to prevent Austria from trading freely or its government from restoring its creditworthiness, Schumpeter saw no reason Vienna couldn’t resume its prewar economic role.

    Frustrated by his own government’s paralysis and pessimism, Schumpeter forwarded his plan for postwar recovery to a British treasury official in Paris, whom he had met before the war. As the treasury’s envoy in Vienna cabled, “The Austrian finance minister does not share the general opinion that Anschluss to Germany was Austria’s only salvation.” He added, “Suffice it to say that it was a rare and fortunate privilege to have had to deal with such a genial, open-minded expert.”

    The Austrian foreign minister had another view. “Schumpeter carries on with his intrigues,” he wrote to the prime minister, “I shall do nothing for the time being, but after the conclusion of the peace treaty it will be inevitable to force his resignation.”
    The Incorrigible Optimist

    John Maynard Keynes, the recipient of the cable containing Schumpeter’s recovery plan, was also a man at odds with his government. Although relatively junior, he was an expert on inter-allied finance and reparations and was “one of the most influential men behind the scenes” at the peace negotiations. And he was by nature, according to his biographer Robert Skidelsky, “an incorrigible optimist.”

    Precocious, supremely self-confident and abominably rude, Keynes was certain that he knew what must be done. The prosperous prewar economy, highly specialized and interdependent, was at a standstill. To get it moving again, as opposed to merely preventing mass starvation, required that the Allies focus on removing barriers to trade, dealing with war debts and stabilizing currencies.

    Keynes tried vainly to get the ears of the Big Four — the leaders of Britain, France, Italy and the U.S. then negotiating at the Paris Peace Conference. The French accused him of having greater sympathy for German suffering than French, while Bernard Baruch and other American officials were convinced that he wanted the U.S. — not the Germans or the British — to foot the bill for the war.

    In the early morning hours of May 4, Keynes was pacing through Paris’s deserted streets, pondering an early draft of the Versailles treaty, when he ran into two friends, one of them Herbert Hoover, head of the Allied food relief program. “We all agreed it was terrible,” Hoover wrote in his memoir.

    The incorrigible optimist retreated to bed, ill with the flu and depressed by his failure to persuade the Big Four to focus on economic recovery. Feeling like “an accomplice in all this wickedness and folly,” Keynes made up his mind to resign, he confided in a letter. “The Peace is outrageous and impossible and can bring nothing but misfortune.”
    Consequences of Peace

    By Christmas, Keynes had exacted some measure of revenge on the Big Four — including his boss, British Prime Minister Lloyd George — by publishing a brilliant peroration, “The Economic Consequences of the Peace.” It savaged the treaty, and was as memorable for its acid portraits of the men in charge as for its gloomy conclusions. Keynes argued that the treaty had sown the seeds of another war by adding to the loser’s debts while wresting away their means of paying them. Vengeance will not limp, he warned, “and nothing can then delay for very long that final civil war between the forces of reaction and the despairing convulsions of revolution.”

    In the terrible years immediately after the war, Germany and Austria succumbed to economic chaos, hyperinflation and a catastrophic loss of faith in democracy by their middle classes. The victorious Allies too suffered disillusioning economic setbacks — not exactly the heroes’ welcome that returning troops were promised. Bruised from their losing battles, eager for success on new fronts, Schumpeter became a banker and Keynes went to work in the City, London’s Wall Street. For Schumpeter, the most creative part of his career was over. For Keynes, the rush of inspiration that led to his “economics of the whole” — rooted in his experiences in the aftermath of the Great War — still lay ahead.

    (Sylvia Nasar, a former New York Times economics reporter and the author of “A Beautiful Mind,” teaches journalism at Columbia University. This is the third in a five-part excerpt of her new book, “Grand Pursuit: The Story of Economic Genius,” to be published by Simon & Schuster on Sept. 13.)

    Comment by Matt — September 9, 2011 @ 7:04 pm

  15. If you’re not hiring workers, there’s not enough labor income, enough consumer confidence, not enough consumption, not enough final demand. /////// his theory is an underconsumption theory

    Comment by charles — September 12, 2011 @ 2:04 pm

  16. I am not sure how schooled Roubini is in Marxism, but essentially he is laying out an underconsumptionist analysis which is not quite what Marx put forward. ///// Yes, Marx did put forth an underconsumption theory

    Comment by charles — September 12, 2011 @ 2:05 pm

  17. It’s been reported that the man who paid five million dollars to have two lunches with billionaire Warren Buffett has been offered a dream job working for him.

    With the high numbers of homeless, hungry and of course UNEMPLOYED nationwide, I can think of better uses for that money.

    He must not have needed a job too badly if he had five mill to blow on a lunch.

    Excuse me comrades, I need to find a trash can ‘cuz I’m gonna be sick.

    Comment by Deborah Jeffries — September 12, 2011 @ 8:09 pm

  18. Didn’t Marx put forward an OVERPRODUCTION theory? Isn’t the real problem the overproduction of capital (i.e. the massive overhang of excess capacity, like factories, machines, etc that can’t be suitably deployed and that lead the capitalists to cut back on investment in new factories, machines etc, leading to layoffs and a downward spiral as the industries that supply those means of production themselves no longer have a market to sell them to, and so forth, rippling through the whole economy?) I think a clear distinction should be made between underconsumption and overproduction, and another emphasis placed on the two senses of the latter: overproduction of consumer goods, and overproduction of means of production themselves (which is more ‘fundamental’).

    Comment by Luis Cayetano — September 13, 2011 @ 4:01 pm

  19. […] For additional comments from the financial world, see this piece by Louis Proyect. […]

    Pingback by Wall Street channels Marx – News and Opinion from Social Democrats USA — March 8, 2012 @ 4:02 am

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