The Marxists Are Back: Should we be worried?

From the Master Investor Magazine October issue.

PART 1

Jeremy Corbyn, a Marxist, is now leader of one of Europe’s most enduring centre-left political parties, the British Labour Party – the one that we were taught owed more to Methodism than to Marx. (Jeremy is no Methodist – an abstainer perhaps, but a republican atheist).

Down in Greece, Alexis Tsipras is back for a second stint this year with 35% of the vote. In Spain, Podemos, another anti-austerity movement with an anti-capitalist edge, has over 350,000 members. In France, where the communist Jean-Luc Mélenchon took nearly four million votes in the first round of the 2012 presidential election, Marxism never quite died. In fact, in a country where philosophical dexterity is prized above all else, it has always been acceptable to describe oneself as Marxist in polite society. In retrospect, we shall probably conclude that this enduring ideology never went away. Yet just 25 years ago, Marxism, which affected to understand the sweep of history through scientific socialism, seemed itself to have been swept away. Marxist governments collapsed like dominoes. As an economic system, the kindest thing that could be said was that Marxism impoverished those who lived in its shadow. With the collapse of the Soviet Union in 1991, a stake was plunged through the vampire’s heart. Now the vampire is back. How did it escape its living death? To answer this we have to consider its history. Marxism arose in response to the economic and social upheavals of the industrial revolution in Europe. Starting slowly in England at the end of the 18th century, by the 1840s, Western Europe (much of England, Lowland Scotland, the Low Countries, Northern France and the Rhineland) was home to factories and rapidly developing railway lines. The traditional social-economic model, where the land-based peasantry tilled the land owned by their aristocratic overlords, was convulsed by the mass movement of agricultural labour to the new towns and cities. Here they were set to work, often in desperate conditions, for the new wealthy class of capitalist entrepreneurs.

In 1848, the year that the contagion of revolution spread right across Europe, the 30-year old Karl Marx, in collaboration with his wealthy sidekick Friedrich Engels, published The Communist Manifesto. This early work contained all of the major themes that would much later be characterised as Marxism: the idea that all history is class struggle; that power in society is wielded by those who control the means of production; and the revolutionary notion that social justice and equality could only be obtained by a Dictatorship of the Proletariat – a political system where all economic power would be concentrated in the hands of the State on behalf of the masses.

Marx was a remarkable thinker of huge range: he wrote on history, contemporary politics (he was obliged to make a living by writing for bourgeois newspapers), philosophy, sociology, psychology and, of course, economics. His economic theories were elaborated in a series of works, many of which went unpublished until after his death in 1883. Namely: his three-volume treatise Das Kapital and the follow-up work (often termed the fourth volume), Theories of Surplus Value. These were all written in London, where Marx came as what we would now call an asylum seeker, in 1849. So what is the economic theory at the heart of Marxist thinking? Marx’s Theory of Surplus Value (value added) is a theory about how wealth is created. He was not the first to address this problem, but his analysis was enduringly influential. Marx argues that all value added in a capitalist economy arises from the exploitation of labour.

Imagine a worker in a boot factory who is paid $10 per hour. He is required to manufacture four pairs of boots per hour, each of which is sold for $10. So, every hour the capitalist generates $40 of product while he pays the worker $10. That’s $30 of gross profit. Once the capitalist deducts his rent (fixed costs) and operating (variable) costs of, say, $20, he accrues $10 of net profit. This is the surplus value. The worker has no claim to this surplus value at all. His capacity to bargain over wages is restricted by restrictive laws (which favour capitalists) and the supply and demand for labour. So the surplus value arises because the capitalist has paid the worker less than his labour is truly worth. Moreover, because capitalists seek to maximise surplus value (accumulation of capital), they are motivated to force workers to work the maximum number of hours feasible at the lowest rates possible. This notion that capitalism is inherently exploitative would apply, for a Marxist, alike to a Bangladeshi sweat shop and a modern progressive capitalist employer like Microsoft Corporation. It doesn’t matter that, on the one hand, workers are living in dire conditions and, on the other they enjoy salubrious life-styles. Both sets of workers are being paid less than their labour is worth.

Now most of my readers will find this argument mildly ridiculous. Obviously the capitalist, bloated as he (or she) may be, has gotten off his backside and invested his own capital, plus probably that of others, plus loans from banks, into a production facility (boot factory) which might fail. After all, there may not be a market for boots at $10 a pair: what if he can only sell them at $5 a pair?

And yet it took economists a good while to formulate a theory that formally accommodated this insight. The Capital Asset Pricing Model (CAPM, developed principally by Treynor and Sharpe in the early 1960s, but based on the earlier work of Markowitz) explains that the value of any asset (usually a stock, but possibly also a pair of boots) is partly a function of the risk associated with acquiring it (or producing it).

So it’s quite natural for us to say that what Marx calls surplus value is actually the return on invested capital commensurate with the risk associated with producing it. Capitalism rewards innovation, good management and risktaking. Not everyone has the qualities to build a successful business. Outside America, however, this way of thinking only became mainstream relatively recently.

By the time of the First World War, the Marxist way of thinking about economics had become hugely influential in come apparent that the Soviet Union and its allies were falling behind in the economic race. (China was barely on the map at this time). While Americans drove Mustangs, ate pizza and travelled the world, Soviet citizens drove goofy Ladas, queued for bad meat and were overwhelmingly forbidden to travel at all. It had also become clear to all who had eyes that the Soviet model, even after Stalin, involved extreme political repression. Of course at the time of Stalin’s purges in the 1930s (and as late as 1948) millions perished, either by firing squad or starvation under forced labour. Most Western Marxists were either purge-deniers, or, like the late Marxist historian, Eric Hobsbawm, believed, along with Lenin, that you can’t make an omelette without breaking eggs. Historians disagree about why the Soviet Union formally dissolved on 26 December 1991. But from the time of the fall of the Berlin Wall in October 1989, still “It was the Red Army, sweeping the Nazi invaders back to their German homeland, which imposed Soviet-style Marxist systems on huge swathes of Eastern Europe, not popular revolutions.” Europe. At the end of the cataclysm the empires of Central and Eastern Europe (and Turkey) fell. Russia was taken over by the Bolsheviks whose official philosophy was Marxism-Leninism. Russia became the USSR, a state in which all businesses were owned and controlled by the state. For the next twenty years, the USSR pursued a policy of Socialism in One Country.

It was the Red Army, sweeping the Nazi invaders back to their German homeland, which imposed Soviet-style Marxist systems on huge swathes of Eastern Europe, not popular revolutions. Arguably, there has never been a popular Marxist revolution, as Marx had predicted. The victory of Mau’s Chinese Communist Party in 1949 was the culmination of long-standing civil war which had only been interrupted by Japanese occupation. And in the 1950s and 60s Marxist governments came to power in Indo-China and in Ethiopia on the back of protracted guerilla wars.

The Cold War was the great geopolitical duel between the US and its NATO allies on the one hand and the USSR and its Warsaw Pact on the other. Yet it was also a great ideological contest in which competing visions of how societies should be organised were put to the test. As late as 1962 Nikita Khrushchev, the Soviet leader, told President John F Kennedy: We shall bury you. He didn’t mean that the Soviet Union would destroy America in a nuclear war (though that was always a fear) but that the Soviet system would win out in the end over American capitalism.

By the mid-1980s when Mikhail Gorbachev came to power that prospect was looking increasingly unlikely. It had become apparent that the Soviet Union and its allies were falling behind in the economic race. (China was barely on the map at this time). While Americans drove Mustangs, ate pizza and travelled the world, Soviet citizens drove goofy Ladas, queued for bad meat and were overwhelmingly forbidden to travel at all.

It had also become clear to all who had eyes that the Soviet model, even after Stalin, involved extreme political repression. Of course at the time of Stalin’s purges in the 1930s (and as late as 1948) millions perished, either by firing squad or starvation under forced labour. Most Western Marxists were either purge-deniers, or, like the late Marxist historian, Eric Hobsbawm, believed, along with Lenin, that you can’t make an omelette without breaking eggs. Historians disagree about why the Soviet Union formally dissolved on 26 December 1991. But from the time of the fall of the Berlin Wall in October 1989, still more the botched Communist coup of 19 August 1991, the entire Soviet system haemorrhaged credibility, even amongst Communist Party stalwarts (like the young KGB officer, Vladimir Putin).

Marxist states had resorted to increasingly bizarre tactics to repress their citizens. East Germany (the GDR) had decreed that Trabant motor cars have concrete pumped into their engine frames, lest they be used to power the microlight aircraft which its citizens increasingly used to escape to the West.

George Bush Senior’s New World Order, during which the first Gulf War was undertaken, was a world in which America was the unique super-power. Marxism was humbled – a lost cause. When Tony Blair took over the Labour Party in 1994, his first strategic move was to abolish Clause IV – the hallowed paragraph of the Labour Party constitution of 1918 which pledged the party to the Marxistinspired nationalisation of the means of production, distribution and exchange.

By the time that Mr Blair came to power in 1997 on a massive wave of popular enthusiasm, Marxism was a dead religion, universally despised. Even the People’s Republic of China was surging on account of Socialism with Chinese Characteristics – an authoritarian form of government in which a one-party state monopolised political power, but where individual capitalists were encouraged to flourish with Victorian property rights. (No Health & Safety inspectors there). To make money is a glorious thing, intoned Zhou Enlai.

But the vampire had not been wrapped in garlic. I discern five inter-related reasons why it re-emerged from its coffin.

First, the American invasion of Iraq in 2003. Led by President George W Bush and vigorously supported by Mr Blair, after several years of dislocation, this adventure turned out to have been such an incompetent, ill-planned and motiveless assertion of America power, that it exposed the extent to which the Free World (America and its clients) had been everything that the Soviet Union had asserted during the Cold War: an oldfashioned Empire kicking ass for its own interest under the guise of ridding the world of weapons of mass destruction. Virtually all of the power structures in this strategic region were indiscriminately smashed, with appalling consequences now apparent.

Second, the Credit Crunch of 2008 and the global recession it triggered. The collapse of Lehman Brothers on 15 September 2008, and the near-collapse of HBOS and RBS in the UK in the following weeks, was the culmination of more than a decade of casino banking during which time mortgages (and other loan assets) were repackaged and sold on to third parties as Securitised Debt Obligations and other exotic instruments. Banks leveraged up their balance sheets with these illiquid assets of indeterminate credit quality. Their much vaunted risk models proved useless. The banking systems in the US and the UK came perilously close to melt-down; and it was only thanks to the two governments pumping huge quantities of liquidity (money) into the system that the financial system remained solvent at all.

PART 2 OUT MONDAY