Marx and the financial crisis

Chris Dillow feels that the ongoing crisis, with its origins in the financial markets, makes Marxian explanations of the crises facing capitalism, which are based on the real economy, less relevant. To Marx, crises in capitalism originated in the real economy. Recessions occur when an over-accumulation of real capital equipment combine with a lack of demand to cause a falling rate of profit and then capital-scrapping, job cuts and slump. This could atleast partialy explain the previous major recessions.

Interestingly, as Dillow argues, Marx showed that capitalism was micro efficient but macro inefficient - individual capitalists, each pursuing profit maximization, could produce an outcome that was bad for capitalists in general (falling profits and crisis). He seems to have taken for granted that individual capitalist enterprises were rationally organized - an assumption clearly belied by the recent happenings in the financial markets.

However, on a broader canvas, as the cataclysmic recent events highlight, Marx was right to show that capitalism was a force for great growth and great instability; right to show that profits arose from exploitation; right to stress that technical progress determines social conditions; right on alienation and primitive accumulation.

But where Marx, and his classical predecessors and even neo-classical successors, failed was in drawing conslusions from these underlying developments. Much before Marx, Malthus had already postulated that the supply of labour would rise to offset increasing demand, keeping real wages down (theory of the "increasing misery" of the working class), and Ricardo (and Smith) had prophesied that the law of diminishing returns would cause the rate of profits to fall thereby leading to a "stationary state" in which economic growth ceased. But they all, including the neo-classical exogenous growth theories, failed to appreciate the importance of technological progress. Explaining how capitalism continues to survive, Dillow writes, "Economic growth is a race between technical progress and diminishing returns. And technical progress has won."