Does a bear s___ in the woods ?


Stephen King: As capitalism stares into the abyss, was Marx right all along? 
We may avoid a 1930s Depression but the best we can hope for may be a 1990s 
Monday, 2 March 2009

    "Modern bourgeois society ... a society that has conjured up
 such gigantic means of production and of exchange, is like the 
sorcerer who is no longer able to control the powers of the nether
 world whom he has called up by his spells."

Those of you with revolutionary zeal will immediately recognise 
these words. Penned by Karl Marx in 1848, they form part of the 
Communist Manifesto. Marx, like Adam Smith before him, had
 a historical view of society's development. Capitalism, with its 
bourgeoisie, had replaced feudalism, but capitalism, according 
to Marx, would be replaced by communism. Capitalism was inherently 
unstable, as Marx noted later in the same paragraph:
".....the commercial crises... by their periodical return, 
put the existence of the entire bourgeois society on its trial, 
each time more threateningly. In these crises, a great part not 
only of the existing products, but also of the previously created 
productive forces, are periodically destroyed. In these crises,
 there breaks out an epidemic that, in all earlier epochs, would 
have seemed an absurdity – the epidemic of over-production."
Whatever else one thinks of Marx, he certainly knew a thing
 or two about the business cycle. Were he alive now, he would
 surely claim his theories were being vindicated. We are, after all, 
witnessing the most remarkable collapse in economic activity 
around the world. Take Japan. In November, industrial production
 fell 8 per cent. That was bad enough. In December, production 
dropped another 9 per cent. That was even more remarkable. 
January's production figures, though, are simply eye-wateringly 
awful, showing a further 10 per cent decline. Production, then, 
is down almost 30 per cent in just three months, a pace of decline 
unprecedented in Japanese post-war economic history. 
Or how about the US, where we discovered last week that national 
income contracted in the final quarter of last year at an annual 
rate of more than 6 per cent, the biggest drop since the early 
1980s. Then there's Taiwan, where exports have been in freefall 
in recent months. Not to mention dear old Blighty, where the 
economy might end up shrinking by approaching 4 per cent this year.
The pace of decline in global economic output is extraordinary. 
On virtually any metric, we are seeing the worst global downturn
 in decades: worse than the aftermath of the first oil shock in the 
mid-1970s and worse than the early-1980s downswing, when the
 world economy had to cope with a doubling of the oil price, the
 tough love of monetarism and the onset of the Latin American 
debt crisis. Moreover, this time we cannot use the resurgence 
of inflation as an excuse for lost output: the credit crunch in all 
its many guises has seen to that. Instead, we have a world of 
collapsing output combined with falling prices: a world, then, of depression.
For many years, Marxist ideas appeared to be totally irrelevant.
 The collapse of the Berlin Wall in 1989 brought to an end the era 
of Marxist-Leninist Communism, while China's decision to join the
 modern world at the beginning of the 1980s drew a line under its 
earlier Maoist ideology. In western economies, Marxist ideas were 
at their most potent after the First Word War when the likes of 
Rosa Luxemburg could smell revol-ution in the air and as the 
Roaring Twenties gave way to the Great Depression of the 1930s.
 I'm not suggesting we're entering revolutionary times. However, 
it seems increasingly likely that the economic landscape in 
the years ahead will be fundamentally different from the landscape
 that has dominated the working lives of people like me who entered 
the workforce in the 1980s. We've lived through decades of plenty, 
where incomes have risen rapidly, where credit has been all too 
easily available and where recessions have been mostly modest 
affairs. Suddenly, we're facing a collapse in activity on a truly 
Marxist scale. It's difficult to imagine the world's love affair with 
free markets being sustained under this onslaught. The extreme
 nature of this downswing will change our lives for decades to come.
The first change relates to the allocation of capital. Increasingly,
 policymakers are accepting that market forces, left to their own devices, 
will lead to a race to the bottom. The dangers are becoming greater 
by the day. Interest rates are close to zero while prices and wages
 are in danger of declining. If deflation takes hold, real interest rates
 on cash will start to rise, creating perverse incentives in capital 
markets. Why bother to buy equities or corporate bonds if you are 
nicely rewarded for hanging on to an entirely risk-free piece of paper?
The efforts to stop this vicious circle are increasingly focused on 
bypassing the banking and financial system. As central banks
 widen the assets they are prepared to purchase to maintain the 
flow of credit to the economy at large, they are increasingly getting
into the capital allocation game. They, and not the market, will at the 
margin decide whether companies and households are creditworthy.
 And as governments increase their spending plans to ward off a
 catastrophic loss of demand, they, rather than companies, will 
decide on how our savings should be allocated.
The second change relates to an increased national bias in the
 allocation of capital. As Nicolas Sarkozy, the French President,
 pushes to offer government funding to French car companies on 
condition they don't outsource French jobs abroad, as US Congress
 signs off a stimulus package with more than a hint of a "Buy American"
 policy, and as the UK Government pushes to encourage bailed-out 
banks to lend domestically as opposed to internationally, we appear
 to be turning our backs on the previous world of heightened 
cross-border trade and capital flows. While these flows have 
undoubtedly been volatile, they have nevertheless allowed emerging
 economies, in particular, to gain a foothold on the development ladder.
 Are we about to cast these countries asunder in our desperate 
attempt to fix our domestic problems?
The third change relates to interference in the price mechanism. 
When it comes to Sir Fred Goodwin's pension, this isn't so surprising, 
but the price mechanism extends far and wide. At the microeconomic
 level, we'll enter a world of subsidised loans with murky political
 undertones. At the macroeconomic level, countries may take the 
opportunity to manipulate their exchange rates in an attempt either to
 gain a competitive advantage or to "default" to foreign creditors.
Some of these changes may be absolutely necessary to prevent 
an outright collapse in global economic activity (although the rise
 in protect-ionist pressures is surely a retrograde step). They also 
suggest, though, that there will be no return to "business as usual" for
 market forces. The cost of avoiding depression is a heightened
 level of state intervention on a scale unimaginable for those who 
believe in the virtues of free markets. While such intervention may
 help prevent the worst ravages of economic collapse, it will ultimately 
do little to foster the entrepreneurial spirit and risk-taking behaviour 
which have, in the past, contributed so much to rising living standards.
 We may avoid a 1930s Depression but, increasingly, we may find the 
best we can hope for is a 1990s Japan. Not quite a Marxist revolution,
 then, but certainly a lasting sea-change in economic performance.

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