Marxism as Panacea for Global Financial Crisis

Joshua Ocheja

jocheja@yahoo.com

A Specter is haunting Europe and America -- the specter of Marxism.

A Marxist’s thought is based on daily practice, a philosophy called Dialectics. Thus, Marxism is both a theory and a practice. The theories of Marxism are sometimes called dialectical materialism; to be clear there is no one answers to a question. A theory is based on a particular set of conditions that are always finite, and thus, any theory is necessarily limited. To test the validity of theories, Marxists rely on practice as the criteria of truth. Using such methodology Marx and Engel examined history, which lead them to elaborate theories of the class struggle, the basis of social relations through economics, and the form of society that could follow capitalism.

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These theories are not immutable truths; they follow something similar to the scientific method. Naturally, there are countless examples of Marxist theories that have been modified, revised, or altogether changed. In this sense, the most important task is to comprehensively understand the method; having accomplished that, you’ll begin to see relevant and up to date answers for modern times.

The Economies of the world are groaning under recession, for reasons that could be attributed to greed and sharp practices in high places.

The effect trickles down like rainfall, with the proletariats at the receiving end of the recklessness of a few. One might tend to agree with the fact that Marxism as a philosophy is both evil and good, however it rests on us to view the society from the Marxist point of view that posit that the wealth of a nation should not be rested in the hands of a few and ask our selves the following questions.

What if the ideals of Marxism were embraced? What if ownership of the means of production was decentralized?

This single practice gave rise to various class struggles in the society, a phenomenon that will exist for all time. The history of all hitherto existing society is the history of class struggles. As Peer Steinbrueck, the German finance minister, put it: "One thing seems probable ... The U.S. will lose its status as the superpower of the global financial system. The world is at risk of losing its anchor. In other words, booms and slumps – bubbles and crashes – are an essential part of capitalism. So long as capitalism persists, we will be forced to endure these convulsions, along with insecurity, home repossessions and unemployment they bring. If we must be sincere, these banks are only being taken over so long as they are making losses. Once their ‘fictitious capital’ (Marx’s term for the capital raised purely by trading financial instruments, without any material basis) has been ‘flushed out’ and the share prices of these institutions have bottomed, they will be sold back to private investors at rock bottom prices and free-market profiteering will resume.

Modern capitalism needs well-functioning banks. Businesses and individuals need liquidity and an effective means of turning their savings into productive investments. But banks perform this function by making bets on the future. This is the purpose for which they exist – but it makes them inherently unstable. They tend to over-extend themselves in the good times and are over-cautious in the bad, exacerbating booms and busts.

Indeed, the betting analogy is spot on – the market is essentially a gigantic casino, where financial institutions gamble vast sums of other people’s money. Trouble is, when they get on a losing streak, no-one will lend them anything more to gamble with, and their creditors come knocking, demanding they pay back what they owe. Instability is part-and-parcel of this system. Any government which claims it has tamed the beast is insincere.

The chaotic and unplanned nature of the market makes it near-impossible to predict the long-term consequences of any action taken by governments or regulators.

The presence of giant mortgage lenders with a couched government guarantee, taking risks on the assumption that there would be a government backstop if things went wrong, forced private sector lenders to give up on trying to compete with them. This crisis has forced governments to take ever further steps to nationalize the financial sector, And not simply to jump-start the failing capitalist system – the banks should be used as part of a planned economy, where the needs of everybody are taken care of without the chaos of the market. These banks should be under the democratic control of the communities they serve and the workers who make them function.

So, what caused this financial crisis? Superficially, one can blame the collapse of house prices. This was brought about as investors began to realize that a large proportion of the debt securities that they were trading were based on sub-prime mortgages that were never going to be paid back. (Debt securities are financial assets based on debt; for example, if you or I take out a mortgage on a house, our bank will sell that mortgage, our debt, on as a security, which will be traded on the market. If we default on our debt, the security becomes worthless.)

However, whilst the collapse of house prices was indeed the straw that broke the camel’s back, this connotes that it was already heavily laden with straw. Marxists understand that historical events don’t occur in a vacuum; rather, they are a result of the build up of contradictions within the system. Once the contradictions become sharp enough, a single event is enough to trigger an explosion. This has many analogies in nature: a single snowdrop may trigger an avalanche, but the avalanche can only happen if large amounts of snow have already fallen into an unstable configuration, leading to a dialectical contradiction between the inertia of the snowflakes (caused by friction and inter-molecular forces, and the stress in the system (caused by the effect of gravity on the weight of the snowflakes).

What were these contradictions? The following quote from the Financial Times gives an indication:

“The degree of leverage that these institutions took on is indefensible. The average large securities firm was leveraged 27 to one in mid-2007. They were not regulated by any prudential supervisor. In effect, they regulated themselves. The lack of transparency was stunning. Many big lenders did not disclose off-balance-sheet risks. In some cases, they did not understand these risks themselves. More fundamentally, they allowed a second, huge financial system to develop outside the normal banking network. It consisted of investment banks, mortgage finance companies and the likes. It was unregulated, not transparent and way too leveraged. But with nine separate and mostly ineffective financial regulators, these risks were ignored. That is, until this second system crashed.”

The whole system of finance capital is based on banks borrowing from other banks to buy equities on the basis that the value of these equities will continue to rise indefinitely. If these equities begin to fall in price, the huge debts of these banks become exposed, and the contradictions in the system become apparent.

Marxists traditionally link capitalist crisis to the tendency of the rate of profit (surplus value extracted per unit capital invested) to fall over time. In order to deduce this tendency, Marx divides this ‘unit capital invested’ into two parts: constant capital, which invested in the production process (e.g. the plant, raw materials etc.); and variable capital, which is invested in staff wages. Surplus value can only be extracted from workers, not machines. Surplus value is the value of the labor given by a worker above and beyond that which is paid to him or her as wages; hence it is the source of profit for the capitalist. Therefore, increasing the constant capital, for example, by investing in new machinery, whilst doubtless improving the production process, will mean that for the same surplus value extracted, a greater total capital (constant and variable) will have been invested; hence, the rate of profit will fall. This manifests itself as a fall in prices of commodities.

Of course, this tendency is not a law – there are other interacting factors which can cause the rate of profit to rise. Marx identified more intense exploitation of labor, reduction of wages below their value, cheapening of the elements of constant capital, and the increase in share capital, amongst other factors.

There is always a time-lag between crises in the financial markets and their effect on the ‘real’ economy, these effects will be felt soon enough, in the form of job losses as companies ‘rationalize’ to safeguard their profits, home repossessions for those who can’t pay their mortgages, inability of small businesses to secure credit, etc. This will initially lead to a mood of depression, but that will soon be replaced by an outpouring of class-anger. Even now, the over $700bn bail-out, which will cost each American taxpayer on average over $5,000, is causing widespread anger amongst the US working class.

Marxists believe control of the economy should not be left to the anarchy of the capitalist market. But are disgusted by the way the working class has been asked to foot the bill for this debacle, whilst the vermin in human form that made millions have got away scot-free. Before the taxpayer is asked to come up with a single penny (or cent), these executives, financial ‘advisors’ and traders whose lust for profit sustains this insane system should have their bank accounts emptied out. It is not acceptable that in the fat years they make huge profits and bonuses, and in the thin years they get bailed out by the rest of us. And nor should nationalizations be carried out simply with the aim of re-privatizing them later, when things pick up. Capitalism has failed to provide a decent standard of living and a secure future, and its failure will plunge millions of workers across America and the world into poverty. Yes, we should nationalize the banks, but if we pay for them, we should benefit from them: these nationalizations should be carried out as part of a move towards a planned economy, placed under the democratic control and management of local workers’ and citizens’ councils, for the benefit of the towns and cities they serve, not the profits of the few.

This shows that capitalism is not only a breeder of economic crisis, war and waste, but is also a system of grotesque exploitation and injustice. When Marx wrote Das Kapital around 150 years ago, he argued that "pauperism (poverty) forms the condition of capitalist production and of the capitalist development of wealth... in proportion as capital accumulates, the situation of the worker, be his payment high or low, must grow worse".

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In other words, capitalism breeds inequality of income earned and wealth owned between the very rich capitalists and the mass of working people. And capitalism can only function by driving workers to the limit in hours of work, in bad conditions and often in near slave labor.

As Marx put it, "If the owner of labor power works today, tomorrow he must be able to repeat the same process in the same conditions as regards health and strength. His means of subsistence must therefore be sufficient to maintain him in his normal state as a working individual. His natural needs, such as food, clothing, fuel and housing vary according to the climate and other physical peculiarities of his country. On the other hand, the number and extent of his so-called necessary requirements, as also the manner in which they are satisfied, are themselves products of history... In contrast, therefore, with other commodities, the determination of the value of labor power contains a historical and moral element."

In other words, the man and the woman of the home must work to make ends meet. To do so, they may need a car to get to work or enough money to pay for expensive daily bus and train services. They will need to pay rent or a hefty mortgage, high power and fuel costs, clothes for the kids, very expensive child or nursery care and so on. All this must be built into a ‘subsistence wage' or workers cannot work. And these necessary requirements are rising all the time. So must wages to match them.

The true test of freedom and choice would be if most working families had a sizeable part of their income that was ‘discretionary', i.e. available to spend on what they liked. And they did not work too long for their incomes, so they had time to be with their children, keep fit, educate themselves or just rest. Anybody who cannot do that is impoverished - and this immiseration applies to most workers.