A Marxist theory of crisis?

Few people would have predicted that a video claiming to offer a Marxist explanation of the recent economic crisis would go viral. Yet a short extract from a lecture at London’s RSA by David Harvey, self-proclaimed Marxist and professor of anthropology at the City University of New York, had received over 270,000 hits at the time of writing.

It has also been embedded in mainstream financial sites and apparently been watched around the world. I have had emails telling me about it from as far afield as Singapore and South Africa.

But a viewing of the video – including the full 31 minute version – shows that it is fundamentally flawed. It is based on a highly selective discussion of conventional economics and a misrepresentation of Marxist theory.

Essentially Harvey ends up recycling the “greedy bankers” theory by dressing it up in Marxist language. He even concedes at one point that: “The financiers do get greedy. No question about it”.

Harvey starts his lecture by outlining five common explanations for the crisis:

• Human frailty. Including greed.
• Institutional failures. For example, inadequate regulation.
• Obsession with a false theory. The establishment was too obsessed with free market notions such as the efficient markets hypothesis and the work of Friedrich Hayek. Therefore there is a need to return to the likes of John Maynard Keynes and Hyman Minsky.
• Cultural origins. It is an “Anglo-Saxon disease”.
• Failure of policy. Too much regulation. This is a view favoured by free marketers such as Glenn Beck and the World Bank.

What should strike anyone who follows the financial media is that he fails to single out the two most important explanations of the crisis (although he obliquely touches them in passing).

First, the idea that excess Chinese savings are at the root of the troubles of the global economy. From this perspective the Chinese have preferred to buy US treasury bonds rather than consume at home. By buying up US debt the Chinese subsidised American consumption and helped create the basis for the housing bubble. This view was endorsed by Ben Bernanke, now chairman of America’s Federal Reserve, in a speech as far back as 2005. It is the closest there is to an official American explanation of the crisis and is highly influential in economics circles.

Second, the argument that greedy bankers were responsible for the crisis. This is probably the most popular explanation among the general public.

However, as Harvey’s lecture proceeds it soon becomes clear why he does not identify “greedy bankers” as a flawed view of the crisis. That is because the notion is at the heart of his own explanation.

Harvey moved on from his outline of misleading notions of the crisis to the letter British economists sent to the queen to explain the economic crisis. He notes that they blamed “systemic risk” for the crisis which, he suggests, gives the game away. What the economists were really referring to he says is “the internal contradictions of capital accumulation”. For Harvey the truth has been unveiled and it is possible to build an alternative explanation of the crisis from that starting point.

The trouble with this argument is that the letter to the queen (PDF) said nothing like what Harvey suggests. Its reference to risk refers to the financial markets rather than anything intrinsic to the production process.

I presume this is the passage Harvey was referring to:

“Risk management was considered an important part of financial markets. One of our major banks, now mainly in public ownership, reputedly had 4000 risk managers. But the difficulty was seeing the risk to the system as a whole rather than to any specific financial instrument or loan. Risk calculations were most often confined to slices of financial activity, using some of the best mathematical minds in our country and abroad. But they frequently lost sight of the bigger picture.”

Essentially Harvey argues that financiers have used their power since the 1970s to ensure that wages have been pushed down. However, this led to a problem of a lack of effective demand in the economy. Therefore capitalism, with financial institutions at its core, had to extend credit to bolster demand and therefore keep the system going. This was the basis of the financial bubble that burst with such devastating results back in 2008.

There are least three problems with this explanation.

First, for those who care about such things, it is completely contrary to Karl Marx’s approach. Clearly Marx died a long time ago but since Harvey claims to follow in his tradition it is a legitimate criticism. Marx’s theory of capitalism, outlined in three volumes of Capital, is long and involved but he certainly does not single out financiers as to blame for capitalism’s inherent problems. For Marx there is an in-built tension between the drive to increase profits and raising productivity. This is regardless of the subjective perceptions of individual capitalists or sections of the capitalist class.

Second, Harvey is completely wrong to suggest that today’s establishment figures quietly understand that the crisis is somehow intrinsic to capitalism. The striking feature of all the common explanations of the economic downturn is their aversion to explanations rooted in the productive sphere.

Finally, it fails to grapple with the specific features of the recent crisis. For example, the fact that it was a consumption-led crisis rather than originating in the industrial sphere.  Or the importance of factors such as the pervasive risk averse culture and green ideas in contributing to the economic downturn.

One note of cheer from the popularity of Harvey’s video it is that it shows many people are interested in better explanations for the recent economic downturn. Unfortunately he does not provide one.