Second time, farce

Rulers of the world: read Karl Marx!

On his bicentenary Marx’s diagnosis of capitalism’s flaws is surprisingly relevant

A GOOD subtitle for a biography of Karl Marx would be “a study in failure”. Marx claimed that the point of philosophy was not just to understand the world but to improve it. Yet his philosophy changed it largely for the worst: the 40% of humanity who lived under Marxist regimes for much of the 20th century endured famines, gulags and party dictatorships. Marx thought his new dialectical science would allow him to predict the future as well as understand the present. Yet he failed to anticipate two of the biggest developments of the 20th century—the rise of fascism and the welfare state—and wrongly believed communism would take root in the most advanced economies. Today’s only successful self-styled Marxist regime is an enthusiastic practitioner of capitalism (or “socialism with Chinese characteristics”).

Yet for all his oversights, Marx remains a monumental figure. At the 200th anniversary of his birth, which falls on May 5th, interest in him is as lively as ever. Jean-Claude Juncker, the president of the European Commission, is visiting Trier, Marx’s birthplace, where a statue of Marx donated by the Chinese government will be unveiled. The British Library, where he did the research for “Das Kapital”, is putting on a series of exhibitions and talks. And publishers are producing a cascade of books on his life and thought, from “Das Kapital”-sized doorstops (Sven-Eric Liedman’s “A World to Win: The Life and Works of Karl Marx”), to Communist Manifesto-slim pamphlets (a second edition of Peter Singer’s “Marx: A Very Short Introduction”).

None of these bicentennial books is outstanding. The best short introduction is still Isaiah Berlin’s “Karl Marx”, which was published in 1939. But the sheer volume of commentary is evidence of something important. Why does the world remain fixated on the ideas of a man who helped to produce so much suffering?

The point of madness

The obvious reason is the sheer power of those ideas. Marx may not have been the scientist that he thought he was. But he was a brilliant thinker: he developed a theory of society driven forward by economic forces—not just by the means of production but by the relationship between owners and workers—and destined to pass through certain developmental stages. He was also a brilliant writer. Who can forget his observation that history repeats itself, “the first time as tragedy, the second as farce”? His ideas were as much religious as scientific—you might even call them religion repackaged for a secular age. He was a latter-day prophet describing the march of God on Earth. The fall from grace is embodied in capitalism; man is redeemed as the proletariat rises up against its exploiters and creates a communist utopia.

A second reason is the power of his personality. Marx was in many ways an awful human being. He spent his life sponging off Friedrich Engels. He was such an inveterate racist, including about his own group, the Jews, that even in the 1910s, when tolerance for such prejudices was higher, the editors of his letters felt obliged to censor them. He got his maid pregnant and dispatched the child to foster parents. Mikhail Bakunin described him as “ambitious and vain, quarrelsome, intolerant and absolute…vengeful to the point of madness”.

But combine egomania with genius and you have a formidable force. He believed absolutely that he was right; that he had discovered a key to history that had eluded earlier philosophers. He insisted on promoting his beliefs whatever obstacles fate (or the authorities) put in his way. His notion of happiness was “to fight”; his concept of misery was “to submit”, a trait he shared with Friedrich Nietzsche.

The third reason is a paradox: the very failure of his ideas to change the world for the better is ensuring them a new lease of life. After Marx’s death in 1883 his followers—particularly Engels—worked hard to turn his theories into a closed system. The pursuit of purity involved vicious factional fights as “real” Marxists drove out renegades, revisionists and heretics. It eventually led to the monstrosity of Marxism-Leninism, with its pretensions to infallibility (“scientific socialism”), its delight in obfuscation (“dialectical materialism”) and its cult of personality (those giant statues of Marx and Lenin).

The collapse of this petrified orthodoxy has revealed that Marx was a much more interesting man than his interpreters have implied. His grand certainties were a response to grand doubts. His sweeping theories were the result of endless reversals. Toward the end of his life he questioned many of his central convictions. He worried that he might have been wrong about the tendency of the rate of profit to fall. He puzzled over the fact that, far from immiserating the poor, Victorian England was providing them with growing prosperity.

The chief reason for the continuing interest in Marx, however, is that his ideas are more relevant than they have been for decades. The post-war consensus that shifted power from capital to labour and produced a “great compression” in living standards is fading. Globalisation and the rise of a virtual economy are producing a version of capitalism that once more seems to be out of control. The backwards flow of power from labour to capital is finally beginning to produce a popular—and often populist—reaction. No wonder the most successful economics book of recent years, Thomas Piketty’s “Capital in the Twenty-First Century”, echoes the title of Marx’s most important work and his preoccupation with inequality.

The prophet of Davos

Marx argued that capitalism is in essence a system of rent-seeking: rather than creating wealth from nothing, as they like to imagine, capitalists are in the business of expropriating the wealth of others. Marx was wrong about capitalism in the raw: great entrepreneurs do amass fortunes by dreaming up new products or new ways of organising production. But he had a point about capitalism in its bureaucratic form. A depressing number of today’s bosses are corporate bureaucrats rather than wealth-creators, who use convenient formulae to make sure their salaries go ever upwards. They work hand in glove with a growing crowd of other rent-seekers, such as management consultants (who dream up new excuses for rent-seeking), professional board members (who get where they are by not rocking the boat) and retired politicians (who spend their twilight years sponging off firms they once regulated).

Capitalism, Marx maintained, is by its nature a global system: “It must nestle everywhere, settle everywhere, establish connections everywhere.” That is as true today as it was in the Victorian era. The two most striking developments of the past 30 years are the progressive dismantling of barriers to the free movement of the factors of production—goods, capital and to some extent people—and the rise of the emerging world. Global firms plant their flags wherever it is most convenient. Borderless CEOs shuttle from one country to another in pursuit of efficiencies. The World Economic Forum’s annual jamboree in Davos, Switzerland, might well be retitled “Marx was right”.

He thought capitalism had a tendency towards monopoly, as successful capitalists drive their weaker rivals out of business in a prelude to extracting monopoly rents. Again this seems to be a reasonable description of the commercial world that is being shaped by globalisation and the internet. The world’s biggest companies are not only getting bigger in absolute terms but are also turning huge numbers of smaller companies into mere appendages. New-economy behemoths are exercising a market dominance not seen since America’s robber barons. Facebook and Google suck up two-thirds of America’s online ad revenues. Amazon controls more than 40% of the country’s booming online-shopping market. In some countries Google processes over 90% of web searches. Not only is the medium the message but the platform is also the market.

In Marx’s view capitalism yielded an army of casual labourers who existed from one job to the other. During the long post-war boom this seemed like a nonsense. Far from having nothing to lose but their chains, the workers of the world—at least the rich world—had secure jobs, houses in the suburbs and a cornucopia of possessions. Marxists such as Herbert Marcuse were forced to denounce capitalism on the grounds that it produced too much wealth for the workers rather than too little.

Yet once again Marx’s argument is gaining urgency. The gig economy is assembling a reserve force of atomised labourers who wait to be summoned, via electronic foremen, to deliver people’s food, clean their houses or act as their chauffeurs. In Britain house prices are so high that people under 45 have little hope of buying them. Most American workers say they have just a few hundred dollars in the bank. Marx’s proletariat is being reborn as the precariat.

Still, the rehabilitation ought not to go too far. Marx’s errors far outnumbered his insights. His insistence that capitalism drives workers’ living standards to subsistence level is absurd. The genius of capitalism is that it relentlessly reduces the price of regular consumer items: today’s workers have easy access to goods once considered the luxuries of monarchs. The World Bank calculates that the number of people in “extreme poverty” has declined from 1.85bn in 1990 to 767m in 2013, a figure that puts the regrettable stagnation of living standards for Western workers in perspective. Marx’s vision of a post-capitalist future is both banal and dangerous: banal because it presents a picture of people essentially loafing about (hunting in the morning, fishing in the afternoon, raising cattle in the evening and criticising after dinner); dangerous because it provides a licence for the self-anointed vanguard to impose its vision on the masses.

Marx’s greatest failure, however, was that he underestimated the power of reform—the ability of people to solve the evident problems of capitalism through rational discussion and compromise. He believed history was a chariot thundering to a predetermined end and that the best that the charioteers can do is hang on. Liberal reformers, including his near contemporary William Gladstone, have repeatedly proved him wrong. They have not only saved capitalism from itself by introducing far-reaching reforms but have done so through the power of persuasion. The “superstructure” has triumphed over the “base”, “parliamentary cretinism” over the “dictatorship of the proletariat”.

Nothing but their chains

The great theme of history in the advanced world since Marx’s death has been reform rather than revolution. Enlightened politicians extended the franchise so working-class people had a stake in the political system. They renewed the regulatory system so that great economic concentrations were broken up or regulated. They reformed economic management so economic cycles could be smoothed and panics contained. The only countries where Marx’s ideas took hold were backward autocracies such as Russia and China.

Today’s great question is whether those achievements can be repeated. The backlash against capitalism is mounting—if more often in the form of populist anger than of proletarian solidarity. So far liberal reformers are proving sadly inferior to their predecessors in terms of both their grasp of the crisis and their ability to generate solutions. They should use the 200th anniversary of Marx’s birth to reacquaint themselves with the great man—not only to understand the serious faults that he brilliantly identified in the system, but to remind themselves of the disaster that awaits if they fail to confront them.

miércoles, enero 09, 2019



Pass on the Gas Tax

Rising fuel prices, whether from reduced subsidies or higher taxes, are tricky to offset, which is why they have spurred social unrest far and wide. What looks new in recent episodes is the sense of political illegitimacy: while paying more is painful enough, not trusting leaders to put the money to good use adds insult to injury.

Andrés Velasco

no gas taxes

SANTIAGO – French President Emmanuel Macron is not the first politician to run into trouble over gas taxes. Early last year, striking truckers brought Brazil to a standstill and helped elect uber-rightist Jair Bolsonaro to the presidency. The “Dump the Pump” movement in 2000 looked like it might keep Tony Blair from winning a second term. In the US, the issue is so politically toxic that inflation has been allowed to erode two-fifths of the value of the federal gas tax since it was last updated a quarter-century ago.

I was also once the victim of diesel-fueled rage. As Chile’s finance minister a decade ago, I tried to close a loophole that allowed truckers to get back what they paid in fuel taxes. The government’s political operatives assured me that we would not cave in under pressure. With trucks blocking major roads and supermarket shelves emptying, their iron will melted away in less than an week. Shame-faced, our government retreated, like Macron and so many others have since.

The economics of gas taxes is as old as the politics. The price of fuel in terms of other goods (what economists call a relative price) plays two roles at once. It guides consumption and production decisions: if diesel is dear, consumers will use less and producers refine more of it. It also redistributes income: expensive fuel means that heavy users are “poorer,” because they have less purchasing power left for other items.

With diesel and other fuels, the relative price that induces the right consumption and production decisions has the wrong distributive effect. Taxing diesel to make it more expensive reduces pollution and greenhouse-gas emissions. That makes educated urbanites who take the subway to work quite happy. It makes rural dwellers who drive long distances, and small business owners who rely on diesel-chugging pickup trucks, exceedingly unhappy.

Increasing a fuel tax is like cutting an import tariff: both moves reduce price distortions, but also produce winners and losers. The standard economics solution is to compensate the losers. When cutting tariffs, compensation is often discussed but seldom accomplished. When it comes to energy prices, compensation can work if the losers are also the poor. Three years ago, when Ukraine cut subsidies on domestic gas prices, a one-time cash payment helped penniless pensioners and low-wage workers heat their homes during the winter.

With diesel, the situation is more complicated. The very poor typically do not own big diesel-chugging vehicles. Nor is diesel used to cook food or heat homes. True, the buses in public transport burn diesel, but a poor citizen can share the extra burden of a price increase with the 20 or 30 others who also ride that bus.

The big losers from a diesel tax increase are solidly middle class, and finance ministers fear schemes to compensate the middle class for at least two reasons. It is politically unpalatable to hand over cash to those in the middle but not to everyone lower in the income scale, making the compensation expensive. And the precedent set in one case can be invoked in countless others. When the currency depreciates, consumer imports become more expensive; as cities prosper, choice real estate becomes dearer; as countries prosper, services – from haircuts to housecleaning – also increase in (relative) price. Is the treasury supposed to compensate the middle class for those losses of purchasing power as well?

So rising fuel prices, whether from reduced subsidies or higher taxes, are tricky to offset. No wonder they have spurred social unrest from La Paz to Lahore and from Cairo to Coventry – and now Paris.

What looks new in recent episodes is the sense of political illegitimacy. To have to pay more is painful enough, voters are saying. Not trusting leaders to put the money to good use adds insult to injury.

Take Brazil. For years, oil giant Petrobras sold fuels domestically at less than the world price, and its shareholders (the largest being Brazilian taxpayers) footed the bill. That much was known. What was not known is that Petrobras was also home to one of the largest corruption schemes ever. Some politicians used the company to hire friends and finance campaigns; others used it to line their own pockets. Tens of billions of dollars are still missing.

Fast forward to the recent past. Starting in 2016, Michel Temer’s new administration instructed Petrobras to end subsidies and begin charging world prices for its products. And when the currency depreciated, prices at the pump went up even more. Domestic consumers took the hit.

Most Brazilians, of course, took no notice of the intricacies of parity pricing. What they knew is that a famously corrupt company was jacking up prices and sticking its filthy hand into their pockets. So when truckers blockaded roads demanding lower diesel prices, 87% of Brazilians supported the strike. The CEO of Petrobras, a respected economist who had been brought in to clean up the company, was forced to resign.

In France, there has been no comparable corruption scandal – at least not recently. But a whiff of illegitimacy hangs over Macron’s laudable attempt to realign fuel prices. Maybe it was the inevitable consequence of the president’s background as an investment banker; or of his imperial and aloof style; or of the decision to abolish the wealth tax as his administration’s first priority.

Convincing middle-class French voters that higher fuel prices were actually good for them was always sure to be an uphill battle. Macron’s style and mistakes made it even tougher. What might have been a narrow taxation row became a clash of identities, of what the British author and editor David Goodhart calls somewheres versus anywheres. Warnings from the Élysée Palace about planetary responsibility did not go over well. Protesters griped that the president was fretting about the end of the world while they worried about getting to the end of the month.

Are such outcomes inevitable? I think not. One can imagine a popular president making diesel as expensive as it should be to prevent the planet from going up in flames, while forcing the wealthy to pay their fair share of government expenses and implementing some clever spending schemes to lighten the load on the middle classes. Much politicking to persuade voters that the president is on their side would also be needed.

Yes, one can imagine all of this. But imagining it is not the same as expecting it. Even Super-Macron could not pull it off. The next enlightened liberal is unlikely to succeed where he failed.

Andrés Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. He is the author of numerous books and papers on international economics and development, and has served on the faculty at Harvard, Columbia, and New York Universities.

China Is Getting Bubbles, Not Growth, for New Year’s

The central bank keeps pumping money into the economy, but the cash ends up in all the wrong places

By Nathaniel Taplin

Champagne or no, New Year’s Eve must have been a somber affair for China’s top leadership, with word that manufacturing activity declined in December for the first time since 2016.

The bad news from the official purchasing managers index was confirmed Wednesday by the privately compiled Caixin index, which further showed new orders in December down for the first time in 2½ years. 
It’s a sign that nine months of monetary easing by the central bank has failed to boost lending to the real economy, though it has succeeded in pushing housing and government-bond prices into bubbly territory. This kink in China’s monetary-policy machinery bodes ill for 2019, and makes predictions that growth could bottom out in the first quarter look optimistic.

Where banks are lending again, it’s mostly to other financial institutions and the government, not the cash-starved private companies that really drive growth. Since the central bank began early last year to cut the amount of cash banks must hold in reserve—its main stimulus tool of late—interbank lending has roared back. Trading volumes for one-day interbank bond repurchase agreements in November were nearly double April levels.

Money is also flowing into Chinese sovereign and local-government bonds, driving yields down 0.4 percentage point since April. And housing prices have rocketed, with those in smaller cities up more 10% from a year earlier in November, the fastest rate since at least 2010.

China’s first sunrise of 2019—but things could keep getting darker for a while.
China’s first sunrise of 2019—but things could keep getting darker for a while. Photo: Wang Haibin/Zuma Press 

But growth in outstanding bank credit to nonfinancial borrowers has barely budged—and actually dipped again marginally in October—while yields on low-rated bonds, often the only kind smaller private companies can issue, remain sky-high. Six-month commercial paper rated AA-minus is yielding just under 6%, same as in mid-April.

Lower-cost finance for local governments is all very well; large and expanding bubbles in the housing market and high-rated corporate and government bonds, less so. The situation is so bad that the People’s Bank of China was actually forced to drain liquidity from the banking system for much of the past two months, skipping its usual daily interbank cash injections from late October to mid-December, the longest hiatus since at least 2016.

This didn’t offset all the cash injected by the PBOC’s reserve-ratio cuts and its special lending facilities in 2018. That banks were so flush in October and November and still not really lending to the companies that need it shows just how dire the problems have become. In the latest acknowledgment, the PBOC on Dec. 20 unveiled a new lending facility for banks that direct loans to small enterprises.
China’s economy is in trouble. Unless policy makers permit a meaningful rebound in the shadow-banking sector—formerly a key source of credit for private companies—or take the more difficult steps to improve private-sector access to bank credit, things could keep getting darker for a while.