Karl Marx was right. This was the striking assertion of Nouriel Roubini in an interview with The Wall Street Journal this week.
The Persian Jewish American economist rose to fame in the wake of the global financial crisis for having predicted the crisis. In September 2006 Roubini told the International Monetary Fund that "the US was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession".
Fortune magazine acknowledged: "In 2005 Roubini said home prices were riding a speculative wave that would soon sink the economy. Back then the professor was called a Cassandra. Now he's a sage."
Nobel laureate Paul Krugman wrote in 2009: "Nouriel Roubini was right. At a time when the likes of Alan Greenspan were dismissing concerns about excessive home prices and declaring that banks were stronger than ever, Roubini warned that there was a monstrous bubble in the housing market and that the bursting of that bubble would cause much of the financial system to collapse. And so it has turned out, with even the most seemingly outlandish of Roubini's predictions matched or even exceeded by reality."
In response to a question from the Journal about what could be done to get the economy going again, Roubini answered: "[Business] claim they're not doing pacts because there is excess capacity and not hiring workers because there's not enough final demand, but there's a paradox and a catch-22.
"If you are not hiring workers, there is not enough labour income, there is not enough consumer confidence, there is not enough consumption, there is not enough final demand.
"And the last two to three years we've had actually worse than this because we had the massive redistribution of income from labour to capital, from wages to profits, inequality of income and wealth has increased. The margin of propensity to spend of a household is greater than the margin of propensity to spend of a firm because they have a higher margin of propensity to save, firms compared to households. So that redistribution of income and wealth makes the problem of excessive lack of aggregate demand even worse.
"Karl Marx had it right. At some point capitalism can self-destroy itself because you cannot keep on shifting income from labour to capital without not having excess capacity and a lack of aggregate demand, and that's what's happening."
Roubini's analysis is fascinating, not because of the more lurid possibilities he suggests following Marx but because he sets out a strong answer in relation to a question of economic theory that eludes me.
The question is this: what drives economic activity and investment? Are the supply-siders right that it is favourable tax treatment that makes it attractive for the owners of capital to invest? Or does rising consumer demand drive investment?
Clearly the supply-siders have held the commanding heights. While the Keynesians remain credible and demand stimulus is still part of the macroeconomic management repertoire of governments throughout the world, the role of demand in driving supply is obscure.
One thesis about America's descent into economic malaise is that wage gains to consumers have not kept up with productivity gains in the economy and the gap has inexorably widened through time. The decreasing ability of consumers to consume at the level of supply has been solved through increasing borrowing. Soaring levels of personal debt serviced consumption, but eventually the credit card was maxed out.
My layman's commentary here makes no claims as to which of the pro or antiKeynesian camps is correct. Rather, I am interested in whether there comes a point where the means of consumers is so minimised that they can no longer consume at the levels necessary for economic health and growth.
I suspect we in Australia have little appreciation of the extent to which many American consumers are down to the bones of their backsides.
Contrary to popular progressive opinion about the heartless Howard and Costello governments that prevailed for 13 years, the truth was plainly pointed out by the National Centre for Social and Economic Modelling that Howard and Costello were in truth champion redistributors of the country's wealth.
Extraordinary natural resource revenues and our government's preparedness to distribute the boom shielded us from the relative diminution of the buying power of American workers and the middle class. Since the post-war heyday of middle-class prosperity, the American dream has been kept alive through unsustainable debt.
Robert Reich, former labour secretary to president Bill Clinton and a centre-left economist, lays out this diagnosis of the American malaise in Aftershock: The Next Economy and America's Future (2010). What he calls "The Basic Bargain" between capital and labour, between business and consumers, has broken down in the US.
Reich starts his book referring to Marriner Eccles, chairman of the Federal Reserve Board from 1934 to 1948. Having been in the thick of the action during the Roosevelt years following the Depression, Eccles wrote in his memoir: "As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth – not of existing wealth but of wealth as it is currently produced – to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery.
"Instead of achieving that kind of distribution, a giant suction pump had by 1929- 30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants.
"In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."