Nouriel ‘Dr. Doom’ Roubini: Karl Marx Was Right - Unregulated Capitalism Leads to Crises

ANALYSIS

on October 18 2011 8:36 PM
  • U.S. and Global Economies
    Economist Nouriel Roubini warned that the euro zone debt crisis is resurfacing after a period of monetary stimulus-induced lull REUTERS
  • Occupy Wall Street
    Three policy mistakes last decade -- including problems that the Occupy Wall Street movement gave voice to -- fundamentally altered the U.S.'s fiscal and economic trajectory. And the nation has been trying to recover ever since. Reuters
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The Occupy Wall Street (OWS) protest movement in the United States represents the arrival of a global wave of social and political turmoil. According to economist Nouriel Dr. Doom Roubini, this turmoil stems largely from high unemployment and stagnant wages, and it was triggered by the failure of laissez-faire, unregulated capitalism and free markets.

Roubini, a New York University professor who four years ago accurately forecast the global financial crisis, said the current global economic system -- capitalism -- will remain in its current crisis, a crisis that economist Karl Marx predicted more than a century ago, until major systemic reforms are implemented.

Roubini said social unrest and demonstrations are all being driven by the same thing, a crisis period for capitalism itself. The current crisis is the global economy's most serious crisis since the Great Depression of the 1930s -- and it was triggered by financial intermediation run amok and a destructive redistribution of income and wealth, from labor to capital.

The nations that have recently seen social unrest and political demonstrations are all driven by the same issues and tensions: growing inequality, poverty, unemployment, and hopelessness. Even the world's middle classes are feeling the squeeze of falling incomes and opportunities, Roubini said.

While these protests have no unified theme, they express in different ways the serious concerns of the world's working and middle classes about their prospects in the face of the growing concentration of power among economic, financial, and political elites, Roubini wrote in an op-ed column for Reuters.

The causes of their concern are clear enough: High unemployment and underemployment in advanced and emerging economies; inadequate skills and education for young people and workers to compete in a globalized world; resentment against corruption, including legalized forms like lobbying; and a sharp rise in income and wealth inequality in advanced and fast-growing emerging-market economies.

Corporations in advanced economies are now cutting jobs due to inadequate final demand, Roubini said, but cutting jobs weakens final demand further because it reduces labor income and demand.

The result? Free markets don't generate enough final demand, Roubini said. In the United States, for example, slashing labor costs has sharply cut labor income as a percentage of gross domestic product. With credit exhausted, the effects on demand of decades of redistribution of income and wealth -- from labor to capital, from poor to rich, and from households to corporations -- have become severe.

Was Karl Marx's Critique of Capitalism Right?

The problem is not new, Roubini said. Karl Marx oversold socialism, but he was right in claiming that globalization, unfettered financial capitalism, and redistribution of income and wealth from labor to capital, could lead capitalism to self-destruct. As he [Marx] argued, unregulated capitalism can lead to regular bouts of over-capacity, under-consumption and the recurrence of destructive financial crises, fueled by credit bubbles and asset-price booms and busts.

In other words, one of Marx's critiques of capitalism is playing itself out right now in the global financial crisis.

Marx argued capitalism had an internal contradiction that would cyclically lead to crises, and that contradiction -- at minimum -- would place intense pressure on the economic system.

Companies, Roubini said, are motivated to minimize costs, save money, and stockpile cash, but this leads to less money in the hands of employees, which means they have less money to spend and flow back to companies, thereby weakening the capitalist system. 

What is individually rational for one firm is destructive in the aggregate, Roubini said.

Now, in the current financial crisis, consumers, in addition to having less money to spend, are also motivated to minimize costs -- to save, to stockpile cash, and to pay down debt -- thus magnifying the effect of less money flowing back to companies.

Free Markets Without Regulation or Social Safety Nets: Disastrous

Roubini added that many of the lessons about the need for prudent regulation of the financial system -- and the need for other redistributive supports -- were lost during the era of U.S. President Ronald Reagan and U.K. Prime Minister Margaret Thatcher, an era that began in 1981. Those policies helped undermine a social-welfare response to economic crises, a response that had lasted from the 1940s until the mid-1970s -- a period of relative social and economic stability. During that same period, inequality fell sharply and median incomes grew rapidly.

What's more, the 1940s-1970s social-policy response was itself a recognition by the enlightened bourgeois classes that to avoid popular revolution and socialism, workers' rights needed to be protected, wage and labor conditions improved, and a welfare state created to redistribute wealth, so that public goods could be financed. Those public-goods investments included investments in education, health care, and a social safety net. Thus, Roubini said, the modern welfare state was born and nurtured, and it later took on the responsibility of macroeconomic stabilization.

However, some flaws in the European social welfare state model triggered an appetite for massive deregulation in the 1980s  -- but that laissez-faire, free-market, unregulated capitalism policy response went too far. As a result, the laissez-faire model has now failed miserably, Roubini said, destroying the balance between markets and public goods. The result has been massive inequality, high unemployment and underemployment, stagnant wages, and other economic and social problems that have led to the global wave of the social and political uprisings in Europe; the Arab Spring movement in the Middle East; and now the Occupy Wall Street protests in the United States and elsewhere.

To Fix Capitalism, There Needs to Be a Balance Between Free Market and Public Goods

Against that sobering backdrop, Roubini added that policy solutions are available to end the crisis, but don't misunderstand: the solutions do not involve simply having companies hire a few more employees, or having one country or two, such as the United States, lower its tax on capital gains, or lower income tax rates.

Countries, Roubini said, need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.

The right balance requires:

1) Creating jobs, partly through an additional fiscal stimulus aimed at productive infrastructure investment.

2) More-progressive taxation and more short-term fiscal stimulus measures with medium- and long-term fiscal discipline.

3) Lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks.

4) Reduction of the debt burden for insolvent households and other distressed economic agents.

5) Stricter supervision and regulation of a financial system run amok.

6) Breaking up too-big-to-fail banks and oligarchic trusts.

In addition, long-term, advanced economies will need to invest in human capital, skills, and social safety nets to increase productivity and enable workers to compete, be flexible, and thrive in a globalized economy, Roubini added.

The alternative is -- like in the 1930s -- unending stagnation, depression, currency and trade wars, capital controls, financial crises, sovereign insolvencies, and massive social and political instability, Roubini said.

Public Policy/Economic Analysis: Roubini is not saying that socialism is better than capitalism: Of the two, capitalism has registered a better performance, he points out.

But understand what Roubini is saying: The free market, alone, is not going to end the global financial crisis.

What's more, in August, Roubini predicted that social unrest would spread soon to other advanced economies and markets, and that's exactly what has happened: It's spread to the United States in its Occupy Wall Street movement, and that protest movement has spread to other cities in the U.S. and around the world.

Further, absent a return to striking the right balance between markets and public goods, conditions are likely to get much worse.

Also understand what kind of statement the above analysis makes -- on the ideas and policy recommendations forwarded by the very-conservative Tea Party faction of the GOP in the United States. (The Tea Party currently dominates the Republican Party and has nearly paralyzed U.S. government operations, not once, but twice.) The Tea Party's belief that free markets are perfect -- that they are self-correcting, self-regulating, and capable of addressing all human needs and social concerns --  is deeply flawed and will not only not end the financial crisis but will make it worse.

In addition to their opposition to short-term fiscal stimulus measures, the Tea Party and many other conservatives are, by and large, opposed to vital investments in human capital, human skills, and the social safety net, even though such investments could lead to increased productivity, which in turn could enable workers to compete, be flexible, and thrive in a global economy.

By extension, the stance of the Tea Party, a major stakeholder in the current economic system, has to change, if its goal is to continue with the current economic system.

Further, the view from here argues that no one should expect an imminent collapse of capitalism, or even a collapse of the American version, corporate capitalism -- because capitalism and free markets are much too nimble and capable of adapting for that sort of calamity. However, to say that the current economic order is not experiencing a crisis would simply not be accurate.

Moreover, the rise of the Occupy Wall Street movement this autumn in the United States represents an unmistakable sign of an American public that wants public officials and private executives to address the problem of high unemployment, stagnant wages, outlandish executive compensation, and social problems caused by laissez-faire capitalism. Even members of the Tea Party should favor reforming the U.S. economic system by using the suggestions that Roubini outlined -- because if the problems are not addressed, let alone solved, even more pressure will be placed on the U.S. economic system, and that pressure will lead to even bigger economic, social, and political reforms.

To Read More News Stories/Analysis Regarding the Occupy Wall Street Protests: Click Here.

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