Groucho Marxism

Capitalism is a system that requires continuous growth. Under capitalism, firms must compete to survive, which means they need to constantly expand and increase profits. To understand why this is so, we need to consider how firms operate. Any firm needs to invest before it can make a profit, and in order to invest, it needs to get money from somewhere. In theory it can get this money from its savings (i.e. accumulated profits), but in practice these are usually insufficient. Instead, most firms have to rely on either debt or equity finance, or a combination of the two. Debt financing involves the borrowing of money from a bank, whereas equity financing involves selling a portion of equity in the company to shareholders.

A firm will only be able to get hold of the money it needs to invest if it can convince a bank (in the case of debt funding) or prospective shareholders (in the case of equity funding) that it will make a return on the initial outlay. And it can only do that by expanding and increasing its profits and outcompeting other firms, hence the need for growth. In essence, money is provided today on the promise that more money will be paid back tomorrow. In the case of debt financing, this future money takes the form of interest payments plus repayment of the original loan; and in the case of equity financing, it takes the form of dividends or profits distributed to shareholders, which need to be larger than the original outlay in order for the investment to be viable.

Thus, under capitalism, firms operate by borrowing money from the future. In this way, firms operate along the lines of a pyramid or Ponzi scheme. These are investment schemes that rely on a continuous stream of new money from new investors to pay returns to earlier investors. In a Ponzi scheme, a fraudster acts as a central hub with victims believing they are investing in a legitimate, non-existent business; whereas in a pyramid scheme, participants are aware they are part of a chain and are directly responsible for recruiting new members to earn money. It is generally understood that both schemes are scams that are doomed to collapse at some point. What is less well understood is that our entire economic system is structured using the same logic.

Under capitalism, firms rely on a continuous stream of new money to pay returns to earlier investors. Where does this money come from? The answer is: from new investors! To see why, we need to revisit the Kalecki profit equation, which I derived in a previous blog post. In its simplest form, the Kalecki profit equation says that gross profits are equal to gross investment. Moreover, the causality must run from investment to profits, as the former is under the direct control of the capitalist class, whereas the latter is not. This makes clear that profits come from new investments, and therefore that capitalism is structured in exactly the same ways as a pyramid or Ponzi scheme. And just like these schemes, capitalism is doomed to collapse at some point. The only question is: when?

We arguably already have an answer to that question, as capitalism has already collapsed, not once but twice: once during the great depression of 1929, and again during the financial crisis of 2008. In both cases capitalism ultimately survived, but only after massive government intervention. The end of the great depression is generally attributed to monetary expansion beginning in the mid-1930s and the massive government spending and job creation spurred by WWII; and the 2008 financial crisis ended due to a combination of large-scale government intervention, including bailouts, stimulus packages, and financial guarantees, as well as significant regulatory reforms. On both occasions, it is likely that capitalism would have collapsed entirely had these interventions not been made.

Marx famously predicted that capitalism would eventually fall and that this would trigger a proletarian revolution that would usher in socialism. The crises of 1929 and 2008 can be seen as a vindication of the first part of his prediction, if not the second. It is worth noting though that the government interventions of 2008 did usher in a socialism of sorts; unfortunately, it was a case of socialism for the rich and capitalism for everyone else! Whilst corporations were being saved by central bank policies and federal government bailouts, workers were left to fend for themselves. As has been pointed out by the Greek economist Yanis Varoufakis, wages shrunk in the aftermath of the crisis, but the price of assets purchased by the rich (and thus their wealth) skyrocketed.

Thus, far from triggering a proletarian revolution as Marx predicted, the 2008 crises left workers worse off and capitalists better off than ever. A similar thing happened during and after the COVID-19 pandemic. It seems our economic system is rigged towards the capitalist class to such an extent that whenever a crisis occurs, capitalists actually benefit from it! In the terminology of Lebanese mathematician and essayist Nassim Taleb, the capitalist class seems to have made itself ‘antifragile’: volatility and disorder only seem to make it stronger. But I think this apparent strength is an illusion. The capitalists’ grip on power is actually extremely tenuous, and they know it. Furthermore, they must be aware that it is only a matter of time before capitalism crashes again.

The reason the crises of 1929 and 2008 did not lead to socialism as Marx predicted is that the left was not sufficiently organised to take advantage of them. One thing we can be sure of though is that another crash will happen at some point. Our role as revolutionary socialists is to make sure we are sufficiently organised to take advantage of this crisis when it occurs and get rid of capitalism for good.