(More) Homage to Karl Marx

(More) Homage to Karl Marx

Ah, we have from the excellent Charles Smith, over at:

http://www.oftwominds.com/blogaug11/crisis-of-capitalism-8-11.html

that Karl Marx did indeed predict the financialization of the capitalist crisis.
So, the problems with using secondary sources...
Mr Smith's blog should be read, btw.

Link to The Authoritarians, by Bob Altemeyer

Here’s a link to the home page for

The Authoritarians, a book by Bob Altemeyer
http://home.cc.umanitoba.ca/~altemey/ It’s a look at the psychology of Authoritarian followers and their leaders. Recommended as Authoritarians pose a danger to the liberty of the rest of us.

A quote:
“...Psychologically these followers have personalities featuring:
1) a high degree of submission to the established, legitimate authorities in their society;
2) high levels of aggression in the name of their authorities; and
3) a high level of conventionalism.
Because the submission occurs to traditional authority, I call these followers rightwing
authoritarians.”

It’s available as a (free) downloadable PDF. Haven’t read it all yet. So far well worth the read. Also available as a PDF is Comment on the Tea Party Movement. Which I have read, and also recommend.

I’d like to thank ScottS for his August 29, 2011 at 12:54 pm comment and link at "Naked Capitalism" on the Sunday, August 28, 2011 article:

"Matt Stoller: Power Politics – What Eric Schneiderman Reveals About Obama."
http://www.nakedcapitalism.com/2011/08/matt-stoller-power-politics-%e2%80%93-what-eric-schneiderman-reveals-about-obama.html

But See also attempter’s reply, for a view on Altemeyer’s own inclinations. As always, one is reminded that this kind of writing stands or falls on its own merits, that is, how closely it describes reality, what ever that is.

Change of Template

I decided to change the template to something which allows a wider column, and hopefully more room so I can post bigger graphs, on the occaision. Hope you find the color scheme acceptable. Any complaints or encouragement please make in the comments section to this post.

Unfortunately, as a result of my change of email address, all my followers got disconnected. My apologies to you all. I will try to talk to Google. But please reconnect if you are one of them. Or if you would like to join them...

Thank you.

(Some) Homage to Karl Marx

(Some) Homage to Karl Marx

Let us offer some praise to a famous man, much in disregard these days: Karl Marx. Not because we’re a Communist, or anything. European Socialism has worked much better.(Can it continue to do so?) We offer it because he predicted this, our present predicament. He didn’t get the initial cause quite right, because his theory of surplus value was off. And he missed some delaying factors. But once he gets rolling…!

To Marx capitalism was a dynamic process, and its destruction an inexorable result of the forces implicit in its structure. He did not predict the action of some other implicit forces in society, which delayed and altered the process. But we see these forces are eventually overwhelmed, and their existence apparently in no way alters the final conclusion.

So what did he predict? Increasing substitution of capital for labor. Resulting in increasing unemployment. Increasing concentration of economic power. Decline of the middle class. Crises and depressions, as supply increases while demand decreases. Increasing misery among the masses. Who eventually react badly. Pretty good for 130 or more years. Of course, he didn’t think it would take that long…But, hey, in good company with Thomas Malthus, who also made predictions that, while also delayed, still seem pretty inexorable.

What he did not predict: The period of increasing well-being for labor, prior to the beginning of the collapse he does predict. Rise of debt and the rise of finance. The rise and role of government as a temporary buffering factor, providing a balance of power between labor and the capitalist. Indeed, he apparently missed the role of government altogether.

However, these factors only change the timing, but not the final direction. Neither did Marx predict advances in technology, but this is not necessary to his theory. It’s covered under the increasing substitution of capital for labor. And as for the end result, well, who can say?


It is not necessary to demand, as Marx did, that the value of a good is determined by the amount of labor that went into making it. (He might have had this backwards. It seems more meaningful to say the value of a good determines the amount of labor that goes into producing it. Clearly, you’re not going to labor to put more value into a good than you’re going to be able to sell a good for. There does seem to be the scarcity factor, also.) It is only necessary to observe that the Capitalist must take his profit from the worker. The worker must be ‘exploited.’ The worker must produce more than he consumes. He must produce surplus value. This is necessary. Otherwise the capitalist goes out of business. So, in fact, does society.
Now if this surplus were consumed in other ways, say by the Capitalist in high living, or the government in taxes and the production of public goods, all would be well and good. But the capitalist faces competition, and so must either drive down wages to subsistence, (and/or expand the work day and/or speed the pace of work(!)) or further invest in capital. Either way, he increases the surplus produced, either by decreasing the size of the market, or by expanding the amount produced. But all capitalists have to do this, so this merely increases the competitive pressure, leading to a crisis and driving the less efficient (smaller) producers out of business. This leads to unemployment, the concentration of wealth, etc., until the system recovers and the cycle repeats itself.

Marx apparently missed this next part: Where wages increase at the rate of the increase of production, so the market expands, there is no increase in competitive pressure, and so no crisis. Of course this is only temporary, as long as a balance of power exists between labor and capitalists, so that labor can share in the surplus value they produce. As long as the buying power of labor expands at the same rate as businesses expand, the surplus is consumed. (We previously mentioned the possible use of inflation for doing this: http://anamecon.blogspot.com/2010/07/producer-consumer-problem-again.html )

This, of course, is only a temporary situation, depending of the ability of labor to force the capitalists to keep increasing their wages, And note this balance of power works to the benefit of the capitalists, by mitigating competitive pressures. But labor must eventually fail in this, because the supply of labor continuously increases, weakening labor’s bargaining power. Note also the role of government: Government provides the legal framework for labor to exercise its power. It also acts to effectively increase wages through redistribution and regulation.

The inability of labor to prevent the taking over control of government by capital contributed to labor’s downfall. This helped permit the capitalists to hold down the wages paid labor, while at the same time increasing capitalization. Marx got this, but here Marx misses the onset of the debt bubble. Because, by borrowing, labor, despite is static income, is able to increase its buying power, its ability to absorb surplus value and so mitigate the competitive forces which bring about crisis. But debt can only carry the economy so far, and when labor reaches the limits of its ability to absorb debt, Marxian dynamics takes over, now with a vengeance.

The Marxian crisis is precipitated as the market suddenly collapses due to the tightening of credit, as the banks perceive that labor has reached the limits of its ability to pay. (Here it was as a result of the Mortgage crisis.) There is a surplus of production. Competition increases. Businesses cut back. Failures increase. Unemployment rises dramatically. (And the tax base erodes. This weakens the power of government.) Wealth becomes increasingly concentrated.

Now the government tries to intervene. It has always served as a buffer, augmenting demand, but now its efforts increase dramatically, maintaining demand by increasing spending. But this project is doomed, because with the increased concentration of wealth, the capitalists have taken over the government, and have arranged so that they do not pay their necessary share of taxes. (Indeed, the situation is aggravated by the increased demands that the wealthy, with their influence, place on government. That is, they are involved in increasingly extracting wealth from government. Thus the government, once captured by capitalists, works to destroy the capitalist’s own market, the buying power of labor, by pumping out money and giving it to the capitalists, rather than preserving the market the capitalists need.) At the same time, the income of the government has decreased, due to increased unemployment. So the government, already under increased debt loads due to the increased strenuousness of its efforts to augment demand during the period that labor was also taking on debt, must increase its debt burden dramatically. (Actually the government does not have to take on any debt at all. It can always print money. See: http://anamecon.blogspot.com/2010/11/banks-are-forcing-debt-on-rest-of-us.html Increasing taxes on labor would not have helped, as this would have left total demand unchanged. Only politically infeasible increased taxes on the wealthy would have provided an increase in demand, as well as a mitigation of supply.)

But government can only do this so far, when the wealthy, who have now committed much of their savings to government bonds, since they are unwilling to lend to others, (and indeed labor, that is the market, is still overextended,) use their influence to put a stop to this process.

It should be mentioned that much government intervention is misplaced, due to the disproportionate influence of finance. By trying to maintain the debt bubble, that is financial institutions of disproportionaate size, the real economy is sacrificed. And since it all depends on the real economy, of course, the government must eventually fail in this project, as well.

So the government ceases its intervention, and now its own demand contracts, as it seeks to reduce its debt. There is an increased surplus of production as demand decreases. Competition increases. Businesses cut back. Failures increase. Unemployment rises dramatically. The tax base further erodes. Wealth becomes increasingly concentrated.

So we have a two step crisis. Assuming this crisis eventually resolves itself, (this is uncertain) the cycle merely repeats itself, and more quickly, because of the increased weaknesses of labor and government.

The crisis may not resolve itself, however, because of the debt bubble. The debt bubble cannot deflate, except by default, and this will be resisted at all stages by those whose wealth depends on it being maintained. Since these will have control of government, this means debt will be forced on labor, (and the smaller business owner, and the middle class, who thus will be swept into the proletariat,) as government seeks to reduce its deficit, as asset prices and wages decline, and the prices of commodities increase. Labor and the middle class will take on more debt to survive, but this can only be a temporary expedient. When it reaches its limits, the workers will then be reduced to subsistence and charity.

So we see that the capitalist, by pursuing power, acquires too much! He then must act to create the misery among the lower classes that propels the proletarian revolution.

So we have filled in some of the details Karl Marx might have missed. I say might have, because I haven’t actually read his stuff, (except for the Communist Manifesto) just reductions of it. We have also skipped the role of trade, and globalization, and the fact that the interests of the industrial capitalist and the financial capitalist increasingly diverge.

And in out analysis, we haven’t reached Marx’s ‘happy’ conclusion, the liberation of the worker from the yoke of capitalism, either. That is a matter of discussion all itself. Indeed, the matter reaches to the very survival of our civilization.

What is a life worth?

Well, on the one hand, it is priceless. But from an economic point of view, a life is only worth about $4,000,000. Of that, $2,000,000 is the person’s worth to himself, and any others he provides for. The other $2,000,000 is the person’s worth to the rest of the economy. How much the rest of the economy benefits from his life’s labor. These figures are very rough, the mean, and of course vary greatly from person to person.


But how do we figure? First, we figure a person is only worth to an economy what he contributes to society. So we figure from a labor force of 150 Million we have a GDP of 14 Trillion. Round that to make the annual contribution to the economy per worker an even $100,000. Times say 40 years labor, about the number of years we suppose the average worker to work in a lifetime. $4,000,000. About half of that goes to the worker, about half to the rest of the economy. That’s the mean. The median worker only gets about$1.4M, but the median worker also probably contributes less than $4M. But what about the people who don’t contribute to the GDP? Well, here we’re counting them the same. Perhaps we shouldn’t. After all, someone who is compensated more than he contributes to society has a negative value to society. But we can also figure not all contributions to an economy show up in the GDP.


This has important ramifications. Such a heartless calculation actually suggests important ways individuals, and society, benefit. It means, for instance, that it is beneficial to individuals if we don’t spend too much saving a life. For instance, we wouldn’t want to spend $1 Trillion to save one life. Everyone else would be that much poorer. The economy would be out $999,996,000,000. That’s just dollars, but the equivalent in lives (valued at $4,000,000) is 249,999. It is 499,999 lives if we take the value a life is worth to the rest of the economy. We would be trading that many lives for one life. This is a bad deal for an economy. If it did this too much, it would literally kill itself.

What about pain and suffering? People are not just economic mechanisms. They have feelings. They feel pain. Can we put a dollar value on that? Sure. Let’s say $1 Trillion on a person’s feelings. Would we want to spend $1 Trillion on a person’s life? We just went through that calculation, and the point is the same. It would overvalue that life, and be a bad deal for the rest of the economy, which is to say, everyone else. It wouldn’t be fair. You can spend $1 Trillion to save one life, but you can’t spend $1 Trillion per person on everybody else, to save their lives. In fact, it works out you can only spend less than $100,000 per year per person. On average.

We can look at it this way: The economy exists to save, and is essentially saving, everybody’s lives, all the time. We’re all on life support. And since the average each worker contributes is less than $100,000 per year, that is all we can spend, on average, per person, per year.

This shows that it is important not to overvalue life. A society which takes excess precautions against the loss of life is the poorer for it. In a sense, it is literally killing more people to prevent the loss of fewer.

Hospitals already often use a rule of thumb. Their guideline is, (often) for spending up to $100,000 per year of life extension. This is equal to our total annual contribution to the economy per worker. For instance, consider extending the life of an elderly person. On the one hand, society typically does not gain any benefit. On the other, the elderly person has already contributed his share to society, and in a sense has earned this consideration, as a kind of savings. And it provides an incentive for people to keep working. But the figure of $100,000 per year is probably too high, considering the limits of the current health care system’s ability to supply health care, and the high rents already collected from it, and contributes to the high costs of medicine today. The rents imply that the benefits to the patient are far less than the $100,000 expended, so the actual value of life is lower than the nominal one. Indeed, if we consider the rent to be 40% of the system, that is, 40% is ‘wasted’ compared to the health care systems of other advanced economies, then the actual value of a person-year is $60,000. This suggests an economic value of $2.4M for a life, lower than our calculated value of $4M.


One interesting, if perverse, example of the extreme is the California death penalty, reinstituted in 1978, which has cost $308M per person (13) executed. Indeed, its total cost $4B, is a substantial share of the California deficit. We can make this calculation: $308M divided by $4M is the total destruction of the lifetime production of 77 people. In this case, the state is effectively killing (the productive capacity of) more people than the criminal ever did. From another perspective, the annual cost of $184M is equal to the total annual contribution of 1840 workers to the economy, almost twice as many as are actually on death row. The work of 1840 workers, wasted.

The EPA, now, gives a figure of $7.9 Million for the value of one life, almost twice the total economic value we calculated, or 4 times the net value of a life to the economy. http://thenewamerican.com/tech-mainmenu-30/environment/6013-epa-reevaluates-the-value-of-human-life

Not a very good trade off. Of course, there is also quality of life. Clean air is better than polluted air, even if the polluted air doesn’t kill you.

Regulations impose costs on producers. By not permitting the externalization of costs, (pollution of one sort or another for the EPA) which by the EPA’s calculations, would cause an increase in death (and disease,) things cost more to produce, and these costs are passed on to consumers. But it also results in less of those things being produced, and since resources are consumed in all production, less being consumed. So in the case of environmental regulations, other benefits accrue than just the saving of lives. Resources are conserved, other things which might be expensive to remedy are reduced. Such things might be considered to be included when the value of a life is overestimated.

Undervaluing life has its own costs. Negative externalities, excess pollution, is encouraged. Overproduction of stuff is encouraged. (This could be an argument for undervaluing life, where increasing the amount of stuff is equated to economic progress!) There are more accidents, as insufficient precautions are taken. There is loss of life and quality of life.

Note, when an economy is poorer, the capitalization per person, and what depends on it, the individual’s ability to contribute to society, thus the value of life, is less. Kenya for instance has a GDP per capita of $1600, $66B/41M but a labor force of 18M, so the average economic contribution per worker is about $3700, times 40 years or about $150K over a lifetime, (average life expectancy about 60, but do they have retirement?) so that is the mean economic value of a life, there.

Back to the US:
A child, on the other hand, has the potential to contribute $4,000,000 to society. But society has not yet invested in him. In fact, (our) society, on the average will invest somewhere around $350,000 in raising a child to adulthood, not counting the opportunity cost of parenting. Most of this cost is born by the family, so does not subtract from the $2,000,000 net contribution. A six year old, for instance, has about $70,000 invested in him, by his family: $60,000 direct costs, and $10,000 or so for his first year of schooling, which one way or another is borne by taxes. Now families are not the only ones to pay these taxes, so there is some subsidy of education by the rest of society. This omits cost- the opportunity cost to the self for his education, when, instead of capitalizing in himself, he could be doing something else.

In fact, it could be argued that the only real loss to society is this investment, and not the inferred profits society takes from his labor. And this investment is all society should be insured against. (This argument is also carried out in: http://en.wikipedia.org/wiki/Value_of_life )

Of course, the actual capitalization may be more or less than that figure, depending on the efficiency of parenting and the educational system, and the social system of the community. Much of the cost of the educational system now seems to be going to rent, judging from the reported decline in results. So the actual capitalization is less.

Further consideration indicates that the health care system may be considered part of the capitalization of individuals. Consider a child who needs a $50,000 surgery to survive and be productive. He is capitalized, by age 20, to $400,000, and so similarly for all medicine. Currently about $2.4T total health care expenditure per year, or $8K per person per year. This ups the capitalization for our six year old to about $120K. (There seems to be some double counting here, unless the family is fully covered from other, social, sources. One might also consider the fact that, except for young children, the expenditure on health up to middle age is probably less than $8K per year, and higher than $8K afterward.) Anyway, the capital investment per person would be $600K ($8K x 75years) + $350K or essentially $1M invested by society in each person, over their lifetime. On an annual basis about $13 K per year per person..

Other considerations enter in. For instance the average life is that of a 38 year old, round off to 40 year old. He has cost $670K capitalization by society, and produced about $2M. Net contribution $1.33M to society. Should we make this the average economic value of a life?

Suppose we were to nuke a city of 1M people. Which would be the loss to society?
Well, the fixed assets would be $180B ($54T/300M x 1M.) But the total loss of human capital would be about $670K x 1M = $670B. So the total is $850B (Compare this calculation with: http://anamecon.blogspot.com/2010/03/nuclear-equivalent-to-war-on-terror.html)
Here we are just counting what we have invested in the city, rather than the loss of any potential gains we had hoped to obtain from it. Just by the way, The wars in Afghanistan and Iraq have cost $1.2T since 2001, the equivalent, in terms of capital investment, of a city of 1.4M people, or larger than San Antonio, the 7th largest city in the US. Estimates of the total costs of the War on Terror run to $4T, but a figure of $2.4T (http://www.homelandsecurityresearch.com/2008/05/cost-of-war-on-terror/) places the cost at slightly more than Chicago, 3rd largest city in US. (If we were just counting physical structure, no loss of life, it would be almost 5 times the city of Chicago, more than the entire state of Illinois, leveled. This is equivalent to the 28 million houses of my earlier post.) Annualized, we are nuking the equivalent, inhabitants included, of Newark, NJ (pop 277K), or Greensboro, NC, (pop 270K) every year. 40 Years of the War on Drugs has cost about $1T, or by this calculation a city almost 1.2M population, or about the size of Dallas, the 9th largest city in the US. (If it helps with the imagination, you can imagine slightly larger cities just depopulated, since the actual physical destruction of buildings, homes and factories just adds on about a quarter of the value of destruction.)

One thing we see is that the value of a life depends on the calculation we are performing with it.

There is an implied social/moral choice in undervaluing or overvaluing a life. When you overvalue a life, you are sacrificing society for the individual. When you undervalue a life, you are sacrificing the individual for society. But sometimes society pays, anyway, when many individuals are sacrificed.

But of course, society is just made up of individuals. Or, individuals make up society.

Zero Interest and the Greek Problem

One way of looking at the problem of zero interest rate is that lenders have a lot of money to lend, but no one to lend it to, as borrowers have a lot of debt, on which they are already paying a high interest. Big supply, low demand. This is the expected end state of the lend-borrow cycle. It is a stable state, which can only be changed by sufficient disturbance. Even the massive borrowing of the government is not enough to disturb it, so the amount of money lenders are holding must be even larger. The only way to get off this state is to eliminate the debt, so the lenders can go back to lending the money to the borrowers. Note, this does not require the lenders to give up their actual money, just their claims on the borrowers.

If we suppose the borrower has nothing, then the only actual loss to the lender is the claim on the future income stream of the borrower.

If we look at Greece under austerity, its income stream will be negative for the foreseeable future. Thus, the Germans, unless they propose to buy up Greece, will do themselves a favor by forgiving the Greek debt. Lending more will only result in larger default down the road. So they will also do themselves a favor by refusing to lend the Greeks any more money, but here the problem is the producer-consumer problem: The Greeks are a net consumer of German production, and thus stimulate the German economy (at the expense of their own. See: http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html ) Without the borrowed money, the Greeks won't be able to continue consuming German production.

However, because of fractional reserve banking, Greek debt is collateral for other money. People borrowed to lend. And others borrowed to lend. That is, Greek debt is money, to its holders, and acts like money. If it disappears, those who borrowed to lend to Greece will have no collateral. The bottom line is forgiving the debt would result in a contraction of the money supply. Because the loans are highly leveraged, that is capital requirements are low, the contraction is likely to be disproportionate to the actual default. This would put additional deflationary pressures on other countries of the Euro periphery, and would also make it more difficult for these countries to pay their debts.

Refusing to lend the Greeks any more money will force the Greeks to pay their taxes, which they seem to be unwilling to do, and/or contract their public sector.

Of course, this does not address the other basic problem, which is there is too much money at the top of the economic pyramid. Since this leads to a contraction of demand in the rest of the economy for real production, there are no profitable real investments for this money to make. The financial sectors of the various nations are simply too big to be supported by the real economies. For US, see: http://anamecon.blogspot.com/2010/06/that-bloated-financial-sector.html )

Thus a large contraction of money at the top might be economically therapeutic. (And with less money to lend, interest rates might well go up, though this itself might stimulate inflation. Hmm...) However, the government should just guarantee the money of the depositors, (ie taxpayers and consumers,) rather than the banks, which need a shaking out anyway. Indeed, guaranteeing the banks just aggravates the problem.

Needs of Society

Society has its needs. Indeed, a society must meet these needs, before it can do things like protect itself and its members. In a viable society, its institutions must each produce more that they cost society. That is they each must produce more than they consume.

If the worker costs more than the value of what he produces, there is no point for the capitalist to hire him. Only if he is worth more to the capitalist than his cost, is it worth the capitalist employing him. It can be said that a worker must produce more than he consumes.

Just as the capitalist must take his profit from the worker, so must society take its profit from the capitalist. Only when the capitalist allows society to take its profit from him, is it worthwhile for the society to have him around. That is the capitalist entity must produce more than it consumes.

The capitalist may do this two ways. He may pay his employees enough that they can contribute to the tax base, that is, that society may take its profits off the employees, or he may allow society to take the taxes directly out of his own profits.

Society must take these profits, since otherwise it will fail. One way society does this is to have a strong enough government to take its profit from its producers. That is the government must be able to collect enough in taxes to sustain itself. If its government fails to do this, that society will fail.

Now one can say that since what a capitalist does is make and build, taxes, and a government, are unnecessary. But what is necessary is the commons, those goods and services which government secures, and often provides. The common welfare, the common capital, is what taxes support. A wealthy society seems to need a large commons, and seems to need a large and strong government to maintain it.

We think we have a strong government. It is not. It is weak. It cannot collect enough in taxes to support itself, and maintain the services and infrastructure(capital) it provides. It cannot convince its people, or its wealthy, that they should pay their taxes. It must borrow, a sign of weakness. Also, it is corrupt. It is captive to many special interests. This is a sign of weakness. It wastes its resources on things that are not needed, that may of themselves be wasteful. And it fails to do needed things. It fails to protect and preserve its commons. It fails to preserve and protect its tax base.

The people borrow to purchase things from foreign countries, things the producers of the country do not make for its people. Society cannot produce enough to exchange for the goods and services it imports. Also a sign of weakness, and of either sloth or misapplied effort.

There are those who do not want a strong government, or at least do not want to pay for one. They think that they will be able to wage war with a weak government. They think they will be able to defend their country with a weak government. They think they will be able to defend their industry with a weak government. They think they will be able to secure and maintain their wealth with a weak government, and a small commons.

They of course do not think of it these terms They merely resent the fact that society must take its profit from them, and therefore they take steps to avoid this. They try to minimize the amount they pay labor, so the government cannot collect sufficient tax from labor to maintain itself, and having corrupted the government, they manipulate the system so that they do not have to pay the necessary taxes out of their own profits. Since these taxes are both inevitable and essential to the maintenance of any society, and a fair amount of taxes for a modern society, they work the destruction of their own society.

From the point of view of society, of course, those who demand more than they contribute, and at no matter what scale, who refuse to let society take its profit off of themselves, are worse than useless.

This is all according to the principle that it is better to produce than consume. A society whose members produce and give to society more than they consume will become unimaginably wealthy, while a society whose members consume more than they produce will consume its capital, and become poor.

The wealthy set the pace. They lead both by deed and example. A society whose wealthy elevate consumption over production, who refuse to let society take its profit off of them and instead insist of taking their profits off of society, is not viable, and will destroy itself. It will consume its capital and become poor, its institutions collapsing.

Leaders are leaders not because of what they take, but because of what they give.