Is it possible that a theoretician and economist who lived more than 100 years ago could accurately predict economic conditions and problems in the 21st century?
The advances in science, technology, and productive capacity in the United States, Europe, and emerging markets would argue against it. However, one scholar contends technology may have changed, but the forces at work in capitalism, industrialism, and commerce have not.
Economist Nouriel Dr. Doom Roubini, the New York University professor who four years ago accurately predicted the global financial crisis, said one of economist Karl Marx's critiques of capitalism is playing itself out in the current global financial crisis -- a crisis Roubini said will worsen if the European Union/Eurozone leaders can't get their act together on a solution for debt-plagued nations in Europe.
Among other arguments, Marx claimed capitalism embodied an internal contradiction that would cyclically lead to crises, and that, at minimum, would place pressure on the economic system.
Companies are motivated to minimize costs, to save, and to stockpile cash, Roubini said, but this leads to less money in the hands of employees. In turn, this means they have less money to spend on goods and services, money that would flow back to companies.
In the current financial crisis, consumers, in addition to having less money to spend due to the above phenomenon, are also motivated to minimize costs, to save, and to stockpile cash, magnifying the effect of less money flowing back to companies.
Karl Marx had it right, Roubini said in an interview with wsj.com. At some point, capitalism can self-destroy itself. That's because you cannot keep on shifting income from labor to capital without not having an excess capacity and a lack of aggregate demand. We thought that markets work. They are not working. What's individually rational ... is a self-destructive process.
Roubini added that absent organic, strong growth in the gross domestic product -- which can increase wages and consumer spending -- what is needed is large fiscal stimulus. In this, he agrees with another high-profile economist, Nobel Prize-winner Paul Krugman, that, in the case of the United States, the $786 billion fiscal stimulus approved by Congress in 2009 was too small to create the aggregate demand necessary to advance the U.S. economic recovery to a self-sustaining expansion.
Without additional fiscal stimuli, or unexpectedly strong growth in the GDP, the only solution to our current problem is universal debt restructuring for banks, households, and governments, Roubini said. However, no such universal restructuring has occurred, he added.
As it stands now, the lack of restructuring has led to zombie houses, zombie banks, and zombie governments, he said.
No Good Choices Outside of Fiscal Stimulus or Debt Restructuring
In theory, Roubini said, the United States can (A) grow itself out of the current problem (but the economy is currently growing too slowly, hence the need for more fiscal stimulus); (B) save itself out of the problem (but if too many companies and citizens save, the flaw Marx identified is magnified); or (C) inflate itself out of the problem (but that has extensive collateral damage, he said).
However, Roubini said, he did not think the country or the world are now at the point where capitalism in self destructing.
We're not there yet, Roubini said, but he did add that the current trend, if it continues, runs the risk of repeating the second leg of the Great Depression -- the Mistake of 1937.
In 1937, President Franklin D. Roosevelt felt pressure from congressional Republicans, and he -- as President Barack Obama has done with the Tea Party-led House GOP now -- gave in to conservatives and cut government spending then. And he did it despite the fact that the first four years of massive New Deal fiscal stimulus had lowered U.S. unemployment to 9.1 percent from a staggering 20.6 percent at the start of the Great Depression during the Hoover administration. The result? U.S. unemployment started rising again, and hit 12.5 percent in 1938.
Cutting government spending prematurely hurt the U.S. economy in 1937 by reducing demand, and Roubini sees the same pattern playing out today, following austerity measures implemented due to the U.S. debt deal.
Economic Analysis: Roubini identifies the core problem of the current U.S. economy in laserlike fashion. It's a riveting, wide-ranging interview that one can watch in full by clicking here.
Roubini also argues the social uprisings in Egypt and other Arab countries, in Greece, and now in the United Kingdom, are economic in origin (primarily unemployment, but also, in the case of Egypt, due to the rising cost of living).
Furthermore, Roubini's view is that although no one should expect an imminent collapse of capitalism, or even a collapse of American-style corporate capitalism -- capitalism and free markets are much too nimble and capable of adapting for that -- to say the current economic order is not experiencing a crisis would be inaccurate.