The title, of this post, I admit, is stated with tongue firmly in cheek.
We have living in Portland the author and retired professor of political science Michael Munk, who has among other distinctions the Central European capital city of Prague as his birthplace. The gentleman is a gregarious sort, having addressed the Eastside Democratic Club last month (at my invitation) and having maintained a large and growing list of progressives to whom he posts emails fairly frequently.
Professor Munk’s email address is “firstname.lastname@example.org”. Now, although since the collapse of the Soviet Union in 1991 Marxism is indeed not so widespread (one might even term it marginal), there is good theoretical and empirical reason to reconsider that judgement.
Marxism accurately predicted the economic inequality we are facing today, a growing economic inequality not confined to the United States; the purpose of this essay is to explain this fact.
In the same manner that one definition of Architecture is “Frozen Music,” one could characterize economics as “Philosophy Set to Mathematics.” Judgements on the human situation, the natural response to varying conditions of life, and the consequent results of various approaches to the basically philosophic assertions made by such judgements, are at the basis of the equations or mathematical models comprising economic decisions and predictions.
Karl Marx came to economics from a background in philsophy, and he wasn’t a very good mathematician. I ought to know: I translated Marx’s book on the history of differential calculus (still in print: 1st edition 1983).
My claim today, a claim based not at all on my knowledge of Marx’s math, is that his economics explains our current economic predicament.
To put it in summary form, Marx said that the value of any product was the total sum of efficiently-used human labor put into it. He pointed out that capitalists shorted workers the wages due them for their labor, and enriched themselves by means of this theft. Worse, the capitalists used mechanical inventions to increase the output per man-hour, and reduced the wages as a result of the reduction in the level of skill needed to produce the same product. As a result the society as a whole will separate into a few wealthy capitalists and a broad mass of underpaid workers, including a “reserve army of unemployed.”
But, Marx went on, the machine cannot be exploited: its value is exactly what you pay for it. The mechanization of production will produce a reduction in profit, not an increase. Of course, when in the 20th century capitalist enterprises produced an enormous increase in gross domestic product, and when the one avowedly Marxist society clearly did not work to relieve oppression of the majority of its citizens, no one could take Marx as having correctly predicted the future of capitalism. As Francis Fukuyama famously put it, “The End of History” had arrived, and it was liberal-democratic capitalism.
The separation of the Wealthy from the rest of us seems to be happening, that’s certain. Here it is, presented in aggregate form:
— and here is the same fact presented in a little more detail:
If you are leery in accepting the world’s greatest experts in US economic inequality as the sole source of documentation, then the US Census Bureau will tell you the same thing (politely omitting the examination of the very top of the income scale):
As for the explanation of this separation of the capitalists more and more from the less and less wealthy working population, Paul Krugman 3 days ago wrote:
first, here’s the chart from the BLS (pdf), which focused on nonfarm business:
Dean Baker warns me that the trend is a bit slower if you look at net output, because depreciation is a rising share of the total. Still, something major is happening.
Nick Rowe makes a good point, however, which is not so much a critique of the robot story as a general puzzle. Income has been shifting to capital, which would seem to increase the return to investment; but real interest rates are low by historical standards, and were low even before the financial crisis, suggesting that maybe the return to investment is if anything low. You might be able to make some headway here by stressing the different between safe assets and risky investments, but it is a puzzle.
What’s the puzzle? Well, as you can see (the source in this case is the Bureau of Labor Statistics) the share of the Gross Domestic Product allocated to wage payments has never been as low as it is now, all the way back to 1947. “Something major is happening.”
Two days ago Krugman showed a chart, copied from an economics textbook, which gave the updated, mathematized, version of what Karl Marx had predicted in 1867.
Start with the notion of an aggregate production function, which relates economy-wide output to economy-wide inputs of capital and labor. . .
Furthermore, for current purposes, hold the quantity of capital fixed and show how output varies with the quantity of labor. We expect the relationship to look like the lower curve in this figure:
Now, in a perfectly competitive economy, we would expect the labor force to achieve full employment by accepting whatever real wage is consistent with said full employment. And what is that real wage? It’s the marginal product of labor at that point — which, graphically, is the slope of the aggregate production function where it crosses the vertical blue line.
Taking a slope of a curve — the definition Professor Krugman gives of the real wage — is taking its derivative. Marx would have been well able to make use of differential calculus, if had been able to master it.
Now suppose that we have technological progress. This manifests itself — indeed, in this context is basically defined as — an upward shift in the production function. I’ve shown two alternative curves, to make a point. Technology A and technology B are drawn so as to yield exactly the same level of output at full employment — which also says that both would lead to exactly the same rise in measured labor productivity. But they don’t have the same effect on real wages! Technology A is just a proportional upward shift in the original production function — which is “Hicks-neutral” technological change. As a result, the slope of the function where it crosses the blue line rises by that same proportion: real wages rise by the same amount as productivity.
The Hicks is John Hicks, the doyen of post-World-War-II Anglo-Saxon mathematical economists [which is to say, of all serious economists]. Krugman holds him in high regard — as do most all economists, to be blunt about it.
But the main thing is that that slope of Line A crossing the blue line of full employment is exactly the same as the slope of the line representing “original technology”: the real wage will be the same.
Not so with Line B. It uses much more capital-intensive investments — in Krugman’s example, robotic assemblers — to do the work needed to produce the increased output. At full employment the slope is near zero.
What we’ve just seen, then, is that the effect of technological progress on wages depends on the bias of the progress; if it’s capital-biased, workers won’t share fully in productivity gains, and if it’s strongly enough capital-biased, they can actually be made worse off.
Karl’s problem was, he didn’t make the qualification Krugman makes: he said that that was what was happening, and it is reasonable enough to assume, the technological progress during the 150 years after Karl’s prediction was less capital-intensive than that during the last 20 or 30 years.
But, long story short, Karl Marx’s predictions seem to be coming true, and the mechanism he provided for his predictions, the economic model he posited, appears to be the world in which we are now living.
You read it here first.