The 'enigma' of capital and the crisis of capitalism

Capitalism's fundamental nature gives rise to two major philosophical challenges. The first is the tension between equality and liberty. Both ideas appeal strongly to our sense of tightness. Democracy implies both liberty, including individual pursuit of economic betterment, and equality among citizens.
But the key is to understand what kinds of equality would contribute to prosperity and what kinds would destroy it. To operate optimally, capitalism requires that all enjoy equality before the law and equality of opportunity. An uneven playing field or an uneven start in the economic race reduces the efficiency of capitalism. Such inequality rewards less able producers or wastes human potential. No society has fully succeeded in establishing full equality in either sense. An individual, who can pay millions of dollars in legal fees, has better odds in courts than one who cannot.
We must remember that redistribution of wealth presupposes that wealth exists to redistribute. Capitalism's second dilemma is the tension between economic security and liberty. Some believe the goal of government should be to provide total economic security for everyone. Others believe that economic liberty should never be sacrificed to the regimentation needed to provide such security. The critical question is how much security government should guarantee. Socialist countries provide total economic security and thereby undermine incentives for production. Instead of creating equality of wealth, socialist governments create equality in poverty.
For Marx capital, like value, is not a thing but a social relation; indeed it is value or rather a collection of values. Only under certain social conditions do the means of production become capital, specifically, when they are used to exploit wage-labour for surplus value. Thus we find Marx describing the process of capital accumulation as the "self-expansion of value". Capital, in its pure form, is money-capital. A capitalist invests his capital, say, in producing cotton textiles. He must advance his capital to buy a factory, textile machinery, raw cotton, etc, and also to buy labour-power. His capital can be divided into categories. Fixed capital is the buildings and machinery that are not consumed entirely in the production process; circulating capital is the raw materials and labour power that are. More significant from the socialist point of view is the division into constant and variable capital. Constant capital is that invested in the buildings, machinery and raw materials. In the process of production, their value, or a part of their value, is only transferred to the finished product. Variable capital is that invested in labour-power and is so called because this is the part of capital that expands. Labour power not only transfers its own value and is instrumental in transferring that of the constant capital, but it also creates new value. We see then, that machines do not create value.
All they do, and this only when set in motion by human beings, is transfer part of their own value (itself, of course, a past creation of the work of human beings) to the finished product. Even capitalist accountants recognise this: the part of the cost of a commodity they put down to depreciation is to cover the value transferred from the buildings and machinery.
Based on the concepts explained by Marxian economics, an effort has been made to understand the current crisis of capitalism. The global financial crisis has naturally given rise to a great many theories about its cause. Most theories focus narrowly on one factor or another like global imbalances, excessively low policy interest rates, and failing of financial regulation etc. However, when we analyse the confronting challenge from a Marxist prism, the root-cause of the crisis is the class struggle between the capital and labour over distribution of the economic pie.
In industrial countries, sustained capital accumulation and the consolidation of capitalist's economic power were held in check through the 1960s by a shortage of labour. Immigration, including guest workers, programme in Europe and 1965 immigration reforms in the United States, and labour-saving technological change, and outsourcing to countries like China meant there was gradual shift in the bargaining power between capital and labour.
By the time Ronald Reagan and Margret Thatcher came along, labour was politically subdued, and real wages for workers were no longer keeping pace with rising productivity. But for capital to be able to sell its wares, workers need sufficient income (there are only so many Yachts a billionaire can buy). So how could demand be sustained in the face of a falling income share for labour? By extending easy credit! This provides both effective demand for goods and, through interests payments, an additional source of income to capital. These are some of the arguments proposed by David Harvey, author of the recently released book: The Enigma of Capital. According to Harvey, it is exactly what has happened.
In the United States, for example, Harvey argues, that the share of wages and salaries fell from about 53 percent of GDP in the 1960s to less than 50 percent in the 1980s, and 2005 was hovering around 45 percent; meanwhile, the consumer debt service ratio (debt service payments in proportion to disposable income) rose form about 10 percent in 1980 to more than 13.5 percent by 2005. Eventually, of course, the house of cards came tumbling down: without a real rise in income, workers were unable to repay their mounting debts, and financial crisis ensued.
How plausible is this story? First, there are some (largely uncontroversial) facts: at least in the United States and the United Kingdom, income inequality has worsened over the past 25 years or so; there was a boom in consumer (especially home mortgage related) lending; and the worst financial crash since the Great Depression. (Harvey argues that indeed, similar trends of rising inequality and if increasing household indebtedness were evident before the 1929 financial crash).
In addition to Harvey, these trends have been noticed by many other: in Fault Lines, Raghuram Rajan tells a similar story, albeit based on the college education premium rather than on class struggle. Rajan emphasis the 90-10 divide: between 1975 and 2005, the purchasing power of those in the 90th percentile of the income distribution saw their wages rise by 65 percent more than those in bottom, 10th percentile. For the later (mostly those who lack a college degree in an increasing skill-based economy), the political expedient solution was to provide easy credit particularly through Fanni'e Mac and Freddi Mac. This made home ownership affordable to those who really could not afford it. Rest of the arguments advanced by Rajan and Harvey are the same: the bubble collapses when the debt-financed consumption boom becomes unsustainable.
The mystery of the financial crash in this way stands solved by Marxists? Not quite. Harvey in his book, The Enigma of Capital has a plausible tale, but what economists will find frustrating with his book is that he has left blank many required details, Harvey, though covers a great many important and interesting ideas. And sufficient detail to yield testable hypotheses are missing.
For instance, when does the declining income share of labour become a critical constraint for capital to sell goods? Does the theory require that real wages actually decline or just not keep pace with rising productivity and real GDP? And does rising demand from Chinese workers - whose real wages are increasing - not help offset the lower demand from American workers whose jobs are being outsourced? One is required to articulate his ideas with sufficient precision to pin down such questions was required.
Fortunately, however, others are already at work modeling this theory with the analytical rigor that economists are likely to demand. Meanwhile, Harvey has written a thought-provoking book that is an important contribution to the "how-on-earth-did-this-all-happen?" So do I buy Harvey's theory of what caused the global financial crisis?
(The writer is an advocate and is currently working as an associate with Azim ud Din Law Associates Karachi)