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Was Marx right?

Posted by Graeme in Economics,Politics at 9:20 am on Tuesday, 15 February 2011

One reason that Marx’s prediction that capitalism would lead to increasing inequality, and then failure, was wrong, was that advancing technology lead to increases in prosperity for almost everyone. Slowing technological change will mean an increase in inequality, so Marx may have another chance to be proved right.

The underlying problem

A key point lies in the conclusion of this paper by economist Gilles Saint-Paul (clearer explanation).

as productivity goes up the economy moves from a Solovian zone where real wages go up with productivity, to a Marxian zone where they fall with productivity.

but he goes on to say that increases in the range of goods available can prevent the economy moving into the Marxian zone.

Progress is slowing

This would not be a problem if technology continued to advance rapidly: but progress has stagnated. Alan Patrick has done his own research into the slowing of innovation and nicely sum’s up Tyler Cowen’s.

This is not even something that needs a study to prove: it is fairly obvious is you compare recent progress with the past. Compare the last 40 years, with the previous 40. The earlier period saw the invention of jet engines, transistors and integrated circuits (“silicon chips”), helicopters, nuclear reactors, the contraceptive pill, electronic computers (and mice), lasers and masers, the internet (yes, really), nylon, photocopiers, ball-point pens, tape recorders, mobile phones and CDs.

Most of what has happened in the last 40 years has been the refinement of those inventions, and making them cheap enough for the mass market. The illusion of continuing rapid progress has been sustained by rapid progress in just one area: the continuing ever-greater miniaturisation of integrated circuits. That again has advanced through improvements to the same process (lithography), and we may be approaching its limits (its too contentious a subject to cover usefully here).

Almost any comparable comparable period in the 19th or 20th centuries was far more innovative than recent decades.

It is actually happening

The scariest piece of evidence is that income inequality is increasing, as expected by Gilles Saint-Paul’s model.

The top 10% (the capitalists and the knowledge workers) are pulling ahead of the rest. The greater rise when capital gains are included shows that the capitalists are pulling ahead of the knowledge workers. Within that top 10%, those at the very top are doing best. Robert H. Frank says:

The share of total income going to the top 1 percent of earners,
which stood at 8.9 percent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflation-adjusted hourly wage declined by more than 7 percent.

Those are all US numbers, but the picture in any developed economy is the same. I picked the US numbers because the US still tends to lead the way in the world economy, and its economy is the best analysed.

The causes

So why is innovation slowing? Is there nothing more to be invented? The answer returns me to familiar themes:

There is plenty of discussion of the effect of anti-innovation patent laws on software and media (see this recent post), but it applies in many areas. Consider a major pharmaceutical company with an existing line up of blockbuster drugs approaching patent expiry. If may either:

  1. Put money into discovering a new generation of completely new drugs (what the trade calls “new chemical entities”. This will replace the income it will lose from patent expiries if it works, but it is risky.
  2. Invent minor improvements on its existing drugs, patent these, and market them heavily to establish them as replacements for the existing drugs before the original patents run out. This is very low risk as it means carrying out fairly straightforward development to produce, for example, and extended release variant — just a new formulation of the same chemical entity.

How far was Marx right?

Of course all this only shows that Marx was right about the problems of capitalism. I do not believe that he was right that change was inevitable, or that state control is a desirable solution. Concentrating power still further would actually worsen the problem.

Its not Marx who was right but Adam Smith: we need a free market, with regulation designed to keep it free and competitive. What we increasingly have is fake free market, with regulation designed to protect business from competition.

My solution may seem drastic, but it may turn out to be the most painless way to fix the problem. The alternative may be to set the seen for a far more drastic change, and one that is much less likely to succeed.

Comments (3)

Comments(3)

Comment by The innovation slowdown IS a serious crisis at 11:25 am on 4 May 2012 at

[...] far back do we have to go to find a comparable period of slow advance? I have already looked at the rapid advances made from 1930 to 1970, so I need to look at earlier periods of the same length. Some inventions are hard to attribute to [...]

Comment by Jack POint at 6:34 am on 7 May 2012 at

The basic problem with Marxism is that it is based on fundamentally unrealistic expectations of human behaviour.

To some extent the disparity between rewards to capital and labour on a global scale can explained by a huge relative increase in the labour force over the last three decades by China and India joining the world economy.

Comment by Graeme at 7:02 am on 30 May 2012 at

True but that is not what I am saying he is right about. The cynical view that people are motivated only by wealth maximisation is also wrong, and tends to worsen human behaviour as people live down to expectations.