Twentieth-century economics — III

Published: May 23, 2011
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The writer is a professor of economics at the International Islamic University, Islamabad 
asad.zaman@tribune.com.pk

The writer is a professor of economics at the International Islamic University, Islamabad asad.zaman@tribune.com.pk

Karl Marx theorised that the dynamics of capitalism would lead to increasing exploitation, until the labourers would revolt to create a more equitable economic system. This Marxist prophecy was wrong, but contained one truth: Increasing exploitation of workers did lead to a breakdown of capitalism during the Great Depression. The same dynamic has repeated itself in creating the global financial crisis of 2008.

We can partition the economy into the real sector and the financial sector. The real sector is where production takes place, while the financial sector is based on activities which don’t give direct results. In the roaring 20s, wild appreciation in stock prices led to a situation where it became substantially more profitable to gamble on stocks than to invest in real productive activities which eventually led to a collapse of the real sector. This was the Great Depression.

The collapse of the real sector led to massive unemployment. Conventional economic theory holds that market forces of supply and demand will automatically eliminate unemployment. Keynes, who rescued capitalism from the fate of Marx, revolutionised economics by repealing the law of supply and demand in the labour market, and urging the government to intervene to help the unemployed labourers.

In her book, The Shock Doctrine, Naomi Klein, gives an example of a contradiction to the central premise of the Keynesian theory which was triggered by the 1970s oil crisis, leading to stagflation in the US. The monetarist school of Chicago staged a comeback by arguing that the Great Depression was caused by government mismanagement of the money supply, rather than a failure of the free market. Using strategies described by Klein, these free market theories were applied all over the world.

Reagan and Thatcher implemented these policies in the US and UK with predictable results. From 1980 to 2006, the richest one per cent of America tripled their after-tax percentage of the nation’s total income, while the share of the bottom 90 per cent dropped over 20 per cent. Between 2002 and 2006, it was even worse: An astounding three- quarters of the entire economy’s growth was captured by the top one per cent. The same pattern of sharply increasing inequality holds globally; the wealthiest 250 people have more wealth than the poorest 2.5 billion people on the planet.

‘Laissez-Faire,’ or no interference, in markets seems like an equitable philosophy — let things take their own course. On the contrary, it is highly inequitable; the poor don’t have choices, while the rich and powerful take advantage of this liberty to extract money from the less rich. Just before the global financial crisis, the value of financial derivatives (which represent different types of complex gambles) alone was 10 times the GDP of the planet. The worth of the financial sector was more than 50 times that of the real sector. This illustrates the increasing inequity that arose between the real productive sector and the financial sector which ultimately broke the backs of the working people. Many people ranging from religious scholars to financial wizards, have correctly traced the roots of the global financial crisis to the limitless greed of capitalists.

Published in The Express Tribune, May 23rd, 2011.

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