Fixing A Capitalist Dilemma, With Marx

An interesting article appeared in the Sunday New York Times. An essay by Clayton M. Christensen claims to have found the way out of the current recession through what he calls “empowering” innovation. However, as I am about to show, his solution is not new or innovative, but something Marx already wrote about.

He begins his essay by correctly pointing out that the Federal Reserve has no means by which to end the current economic crisis. It has already tried everything that it can to help. It has lowered the interest rate to encourage borrowing to no avail. It has gone through three rounds of quantative easing (printing more money) failing to get the banks to lend it out. I do not believe there really is anything left the Fed actually do.

Christensen also correctly recognises that the problem stems from a lack of mobility of capital. As he says, “…cash hoards in the billions are sitting unused at Fortune 500 corporations and at private equity funds.” Any basic knowledge of economics tells you that capital has to flow in order for capitalism to function. If capital cannot move, say a huge crash of credit going unpaid, capitalism will seize up and go into recession. (This is part of what happened in the global Collapse of Capitalism in 2008.)

Clearly there is a problem here today with the current recession, which we seem unable to end. As pointed out in the NYT essay, this recession has gone on quite longer than previous one. Shockingly much longer when one looks at the numbers.

“In the seven recoveries from recession between 1948 and 1981, according to the McKinsey Global Institute, the economy returned to its prerecession employment peak in about six months.

But the 1990 recovery took 15 months to reach the precession peaks of economic performance. After the 2001 recession, it took 39 months. And now our machine has been grinding for 60 months..”

The dismal nature of this recession aside, Christensen has formulated a strategy to get us out of it. His theory involves three types of innovation. One specific type must be carried out in order to repair the economy. The problem, according to him, is that the wrong innovation is being carried out preventing recovery. Allow me to go into his theory by showing the three innovations:

1. “Empowering” Innovations
These transform complicated and costly products available to a few into simpler, cheaper products available to the many. The Ford Model T was an empowering innovation. So is cloud computing, which transformed information technology that was previously accessible only to big companies.

Empowering innovations create jobs, because they require more and more people who can build, distribute, sell and service these products. Empowering investments also use capital — to expand capacity.

2.“Sustaining” Innovations
Like the Toyota Prius, these replace today’s products with yesterday’s products and create few jobs.

3. “Efficiency” Innovations
These reduce the cost of making and distributing existing products and services. Such innovations reduce the number of jobs, because they streamline processes.

With these three different kinds of innovations, he proceeds to explain what the problem is today.

“The answer is that efficiency innovations are liberating capital, and in the United States this capital is being reinvested into still more efficiency innovations. In contrast, America is generating many fewer empowering innovations. We need to reset the balance between empowering and efficiency innovations…

“…America today is in a macroeconomic paradox that we might call the capitalist’s dilemma. Executives, investors and analysts are doing what is right, from their perspective and according to what they’ve been taught. But when capital is abundant and certain new skills are scarce, the same rules are the wrong rules. Continuing to measure the efficiency of capital prevents investment in empowering innovations that would create the new growth we need because it would drive down their returns.”

Essentially, he is saying that capitalists are not investing in creating products (“empowering” innovations). His is also saying that it “would create the new growth we need because it would drive their returns.” The capitalists are taking their capital and putting it into “efficiency” innovations to make their already existing manufacturing processes cheaper, more efficient. This in turn does not create jobs. He is criticizing them for not being job creators, and instead making their own functioning more cost efficient.

The answer Christensen is advocating s a return to production. This is what I have previously said should be done Marx correctly pointed out that commodity production is the only thing that creates value. This “capitalist dilemma” is exactly that, the refusal to invest in commodity production, “empowering” innovations. Making labour more efficient doesn’t create new value, creating more commodities does.

In essence, Christensen is only coming into by accident what Marx has already pointed out and explained. I for one, as well as many other Marxists have already advocated this. Commodity production is the only thing that can end a recession because it is the only thing that can create value.

This is in line with what I have said in previous videos about the Quantative Easing rounds. Capital is being given to banks which are supposed to lend it out to begin production and consumption. Instead they have been hoarding it and entering it into their books as profit. They’re not doing what they’re supposed to be doing with the money.

The banks won’t lend it out because the have no faith in the economy to be profitable and would get a return. But, there is no faith in the economy because the money is not being lent out. It’s a vicious circle of contradiction, as Marx said; capitalism is a system of contradiction. There is also no new production because firms are instead choosing to make existing production more efficient, thus raising profits. This is more profitable for them than taking a chance on new commodity production.

This is why, as Christensen said, according to McKinsey Global Institute, our recovery from this recession is taking longer than ever. A historical 6 months as opposed to now, going on 60 months. Because commodity production has not begun once again as it has in the past.

If this is the full way out of the recession, the answer lied with Marx. Christensen has juts repeated what Marx said with new words, from another perspective. This shows once again that the Marxist critique of capitalism is as valid today as when it was written.

Original NYT Article

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