Was Karl Marx always wrong?

10 December 2013   Was Karl Marx Always Wrong?   Professor Douglas McWilliams   It doesn’t seem long since my last lecture. And as I’ve been travelling around the Middle and Far East for most of the period it seems even less time to me. Fortunately the airline connections worked and I got back into the UK yesterday and am here.   I do hope that the provocative title hasn’t misled people into thinking that I will give a detailed explanation of Karl Marx’s key views and a reasoned critique. There are so many people who can do that so much better than me that I won’t waste your time in that way.    I will touch on some of his views but my aim today is to use them as an introduction to the impact of globalisation on profit shares arguing that one of the initial impacts of globalisation is to make businesses more profitable.    And as a subsidiary question look at the point that workers who are initially exploited in the sense of being paid relatively low wages but whose real pay goes up fast as a result of high profits leading to a high rate of economic development may ultimately be better off than workers whose pay isn’t so low initially but for whom real pay goes up more slowly as a result of lower profits and less economic development.    It is a paradox that in some circumstances the exploited worker does better than one who is not. But obviously not in all circumstances….   Background The first thing we need to be aware of is that the world economy is dealing with not only the challenge of globalisation but also an amazing technological revolution. Not only the fact but also the nature of that revolution has implications for profits.    Essentially much of the world economy is increasingly based on information and communications technologies in one of their various forms. But the very great economies of scale associated with these technologies mean that profits are difficult to predict and are likely to be volatile. Indeed it is likely that there will be oligopoly or monopoly and possibly both of these and a volatile profits streams as the oligopolistic sectors veer from being more competitive with each other and less profitable to being more monopolistic and more profitable.   But the technological revolution has led to a substantial fall in. the price of capital goods – most obviously computers. Cheap computing has revolutionised economies and made lots of businesses (including my own) possible when with previous technologies the sums wouldn’t add up.   Karl Marx and his theories Let me turn now to Karl Marx and his theories.   It is fashionable amongst some to use Marxist today as a term of abuse. Indeed one of the Daily Mail’s and other parts of the right wing press’s criticisms of the Miliband family is that Ralph Miliband, (David and Ed’s father) whose writings I studied at university, not only allegedly ‘hated Britain’ and ‘ran over a cat with his bicycle when drunk’ but also was a ‘Marxist’.   I want to rescue Marxist from being simply a term of right wing abuse.   Actually Karl Marx, whatever the crimes committed in his name, was a serious economic and sociological thinker, very much in the classical tradition of Adam Smith and more especially David Ricardo, whose work deserves study by a wider group than the relatively limited numbers of people who are committed Marxists.   His theories are complex and I cannot accurately summarise them in a few short sentences.   But I think that the key is that he saw an evolution of history from feudal or slave systems through capitalism towards communism. He regarded capitalism as an improvement on feudal systems.    One of the things that I’ve always liked about Marx is that he saw profits as the heart of the capitalist economic system. He believed that when profits where high, economic growth was faster. But he argued that profits were essentially exploitation and that pressure from labour not to be exploited and competition between capitalists would eventually cause capitalism to collapse of what he called ‘its own contradictions’. This would happen though a squeeze on profits leading to a squeeze on capital accumulation and which would cause growth to slow, increasing the tension between the classes as the system lost its ability to supply the demands made on it by the workers.   My Marxist supervisor for my Master’s degree Andrew Glyn wrote a book about the decline in profitability in the UK in the 1960s and 1970s under pressure from the trade unions and concluded that this could be the moment when capitalism collapsed in the UK. He was not far wrong – only Mrs Thatcher, the split in the Labour Party as the SDP was formed, the distaste of the British public for trade union excesses and the emergence of the new technologies of the 1980s and the beginnings of globalisation combined to prove him wrong. But it was a close run thing and without a remarkable combination of forces coming in at the same time he could easily have been right.   Looking for a Marxist explanation of the current phase of globalisation I’ve discovered some interesting material from the Trotskyite Mick Brooks from his ‘In Defence of Marxism’ website.  Most workers in the United States and the other rich countries did gain better wages and conditions - for a time. They did it by organising in trade unions and threatening the strike weapon. Any strike shows that when the workers stop working, nothing gets done. It's us that produce the wealth. But now big business is trying to take back all the gains of past struggles. Why? - because they can. Because they can roam the world looking for cheap labour to exploit. Because they can sniff out and batten on to low pay pockets in rich countries. Because if they can use child labour, they will use child labour. Because if they can use slave labour, they will use slave labour. How does all this affect workers in rich countries such as the United States. In 1973 there were nearly 1.5 million clothing and textile workers in the USA. Some of them have lost their jobs as firms like Nike pull up stakes and go where they can get away with paying workers less. While only 4% of clothing was imported into the States in the 1960s, it's now gone up to 60%. But 860,000 still work in the rag trade in the United States. American bosses have responded to foreign competition in different ways. One response of textile and clothing companies in the rich countries to foreign competitors has been to make sure that, if they're paying you more than workers in Pakistan or El Salvador, they get more out of you.’   What he is saying is that globalisation increases the ability of the capitalist to exploit the workers. Obviously he thinks this is a bad thing….but whether or not it is a bad thing, let’s check first on whether it is true or not.   The growth in the world’s labour supply The first issue is what has been happening to the world’s labour supply.   There have been two factors at work here – a demographic explosion in the emerging markets and a large movement of labour from agriculture to industry and services.   As a result of the combination of these two factors there has been a huge increase in the world’s effective supply of non-agricultural labour.   The total labour force in the advanced economies between 1980 and 2010 grew by 23%. But in the emerging economies it grew by 87% over the same period. But more importantly, whereas in 1980 60.8% worked in agriculture, by 2010 this proportion had fallen to 38.5%. In the advanced economies the share in agriculture also fell – from 14.2% to 4.7%.    The combination of the demographic change and the shift out of agriculture in the past 30 years, has caused the world’s non-agricultural labour force to grow by a staggering 115%.    In effect, the worldwide capitalist system has been force fed with industrial labour supplies.   What has been happening to profits? So having established that there has been a very sharp increase in the supply of labour, what has happened to labour’s share of income.   The distinguished economist Nicholas Kaldor  who was one of Harold Wilson’s economic advisers (and someone whom I remember vaguely from my days as a postgraduate student though he wasn’t the sort of person to bother with someone who was then as insignificant as me) summarized the statistical properties of long-term economic growth in an influential 1957 paper.[1] He pointed out six 'remarkable historical constancies revealed by recent empirical investigations': The most important of these is his assertion that the ‘shares of national income received by labour and capital are roughly constant over long periods of time’   His broad generalizations, which were initially derived from U.S. and U.K. data, but were later found to be true for many other countries as well, came to be known as 'stylized facts'.   In my previous lecture I pointed out the occasional operation in economics of what the sophisticated call Heisenberg’s uncertainty principle or what the less sophisticated call Murphy’s Law or Sod’s Law that when you start observing a variable it starts behaving differently. And indeed the data on labour shares of income has started to behave differently since Kaldor made this observation.   Because the labour share of income can be measured in a variety of ways, I’ve looked at various different studies and taken the conclusions from each of them.   What they all show is that there has been a sharp fall in the proportion of total income going to labour (and a corresponding increase in the return to capital).   My first exhibit is from the McKinsey Global Institute . It claims a 7.1 percentage point share in the labour share of income since its peak in 1975 for ‘advanced economies’.   My second exhibit is from the OECD, courtesy of the Economist 2nd November edition (I apologise for some overlap with the Economist article of that date – we are both interested in similar things – but the Economist article only looks at history whereas this lecture looks forward as well!).   The OECD data shows the labour share of income edging down also since the mid-1970s in South Korea, Germany, Japan, Britain, the US and Mexico.   My third exhibit comes from a very comprehensive study from the National Bureau of Economic Research in the US  and shows the data for the world’s 4 largest economies – US, China (though only for a relatively short period), Japan and Germany. It again confirms the downward movement in the labour share.   It is also interesting that the three emerging economies for which we have data in this sample – China, Mexico and South Korea - have much lower labour shares of income than in the advanced economies (which might be a bit of evidence to support Marx’s contention that capitalism would ultimately bid profits down to a level that is too low to permit economic growth).   What this suggests is that the force feeding of the world economy with non-agricultural labour has helped shift the distribution of income towards the capitalist.     Other explanations So far, so good – the world’s labour force has growth rapidly and the development of this reserve army of labour has helped the capitalist increase his rate of exploitation.   But remember where I started – there is a bit more than this going on. Globalisation has coincided with the emergence of Information and Computing Technology which has massively forced down the cost of capital goods such as computers. The NBER study by Karabarbounis and Neiman suggests that over the period the cost of capital goods has dropped by 25% relative to consumer goods over the past 35 years and that this has made it attractive to swop labour for ICT and software. They attribute about 5 percentage points of the fall in the labour share of income to this – suggesting it accounts for slightly more than half the fall. As I haven’t carried out my own research on this I can only observe – my instinct would be to attribute relatively more of the fall to globalisation (combined with immigration in some economies) and slightly less to the ICT. But clearly both are important.   Will this trend continue? If you are an investor, one of your interests must be whether the rise in equity values that has been associated with the falling labour share will continue.   I’ve argued in the past that there have been two driving forces behind the strong equity markets of the last 48 years – higher profitability and falling yields.   I dealt with the issue of yields in my lecture on the Chinese savings glut last year. It will take a long time to adjust the structural nature of the Chinese savings glut – though this must happen eventually. As a result, it is likely that yields will remain depressed for some time – perhaps the next 20 years – although there will be cyclical fluctuations.   But I suspect that at the very least the pace of growth in profits shares will decline and that in returns on assets may even go into reverse.   First, the scope for demographic gains in the supply of labour is much less than before.   This slide shows the slowing down in the growth of the labour force in the advanced economies.   And this shows the slowing down in China.   Taking the trends together, there is a slowing down in the world’s labour force growth over the next 20 years compared with the past twenty.   But on top of this, the scope for boosting the industrial labour force by bringing people out of agriculture into other sectors is much reduced and will be reduced further by the need to feed and provide resources for the world’s population. So compared with the non-agricultural labour force growth of 115% in the past thirty years, over the next 20 years, its forecast growth is only 42% - a slowing down from 2.6% annual growth to 1.8%.   At the same time the growth in ICT investment both in absolute terms and as a share could well mean that we move to a point where returns on investment are significantly lower than in the past. So even if the share of labour worldwide continues to edge down, if much more slowly than before, the impact of technology is now sufficiently mature for it to be likely to lead to an edging down in the return on capital.   In the circumstances, this probably means that we are somewhere near the point where the world boom market for equities that has lasted nearly 50 years might be coming to an end.   Note – I am not predicting a slump but merely an end to a process where equity values increased strongly in real terms over the cycle.    This is a result of two factors – first, yields are likely to remain low but are unlikely to fall significantly on a cyclically adjusted basis. And second the world wide force feeding of the labour force with extra people both for demographic reasons and because they could move out of lowly paid jobs in agriculture in the emerging economies is slowing down sharply. The latter effect was one of the main causes in the falling labour share of income.         The optimal rate of exploitation I got interested in the concept of the optimal rate of exploitation when I was in Chicago this summer. For those of you who don’t know, Chicago has an amazing art gallery called the Chicago Art Institute which is one of the really great galleries of the world – ranking with the Louvre, the Hermitage and the London galleries.   If you look at how its collection was created, it was Chicago’s immense wealth in the period from about 1870 to 1950 or so that financed the bedrock of the collection.   Why was Chicago wealthy?   Well it was the end of the railroad from the South and was where the African Americans after the Civil War migrated in search of a better life.   My guess is that the surplus of labour that was available held down wages and enabled the capitalists to make the huge profits that financed the art collections that ended up in the museum.   The question in my mind was ‘how much worse off were the workers for being exploited?’ Clearly they were worse off in the short term because they got low wages but were they worse off in the longer term, since the economy would grow faster?   I think that the answer for Chicago is that they continued to be worse off since the faster growth of the Chicago economy probably just increased the number of people coming to the city.   But in China, where the same process is going on right now, wages and living standards are rising very rapidly because the low wages and high profits have led to extremely rapid growth.   I did some simple maths using a simple model just to see when low wages made you worse off and when they didn’t. The answers are quite interesting. Labour shares of significantly below 30% of GDP take a very long time indeed to generate high enough wages growth from growth to compensate for the low wages initially. And labour shares of over 70% squeeze profits and hence investment so much that very quickly the lack of growth outweighs the benefits of the high starting wages.   At present we are near the bottom of the range in emerging economies and in the middle of the range in advanced economies.   So the Marxist tipping point, where the squeeze on profits is such that it starts to cause capitalism to collapse of its own contractions comes when the labour share gets persistently above 70% of income. This was the case on a temporary basis in some countries – especially the UK – in the mid-1970s. But since then, the ability of the capitalist to exploit labour which has resulted from a number of different factors has allowed capitalism to recover. And although the labour force growth from globalisation is slowing down, there is still enough growth to make a profits collapse over the near future fairly unlikely. If it does happen, it is unlikely to be in the current middle phase of globalisation but is more likely in the late stage which is likely to start in about a quarter of a century’s time.   So in answer to the question I posed at the beginning, ‘Was Karl Marx always wrong?’ He has not yet been proved right in most industrial economies. But we got very close, especially in the UK in the mid-1970s to proving him right and might yet do so at some point later on in this century.       © Professor Douglas McWilliams 2013