By Richard Morrish
“Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until debt becomes unbearable. The unpaid debt will lead to the bankruptcy of banks, which will have to be nationalised, and the State will have to take the road which will eventually lead to Communism. “
Karl Marx, 1867
Never has a statement been more prophetic than that of Karl Marx made 140 years earlier. It was as though he saw it all coming, when those within the current financial markets had no clue except for a small minority. Maybe it should have been a case that Hank Paulson and Ben Bernanke should have read Marx rather than the Great Depression and Economics. Perhaps then we would have avoided the current crisis. Whilst this may sound flippant given the depth of the current crisis, it is not such a far cry from reality. Marx was a social economic thinker with passion and dedication to understanding the flaws of the capitalist system and therefore its ultimate natural result. He took forward his thoughts on this topic as an end result rather than a perception of a social ideal. This was what others would be able to do, communism by enforcement rather than enlightenment and inevitability. The fact remains that as much as Marx’s theory and concepts arrived at communism by inevitability, it has been proved even more recently that communism itself is also a flawed system inevitably doomed. This has been seen with the collapse of the Soviet Communist system and the Chinese system at the turn of the final decade of the 20th century. So does this mean that the entire system is doomed to inevitable failure regardless of communist or capitalist, or is there a chance that there is something more important behind the overall resultant challenges that have been created?
The idea of this piece is to see whether the recent events within the western economies that have forced the governments to bail out the banks across the entire G7 are the staging posts to communism or is it a case that the governments will have to step back from such an action. At the current moment it is clear that the G7 with the exception of Japan is moving closer and closer to communism with the crisis. Yet, this is not really a position that has only just been developing, but in fact one that has been in process for some considerable time. The home and founding fathers of this situation has been none other than the USA itself. It is important to understand how the overall structuring of the systems within capitalism can ultimately lead to communism through default rather than planning. This has in itself been summed up by the current leaders of the US system, Ben Bernanke, Geithner and Obama plus many from the recent past. The single most used statement is “too big to fail!” This is what had become the burden to the soviet state and the Chinese state, the monopolies were just too big to fail but ultimately they failed and so did the political systems with them.
So how come that the US has been nurturing a system that is as ultimately diametrically opposed to their whole ethos as a country and a nation. The answer comes with the dream of big is best which has been the foundation of the US economy since the post war period. Yet, this is a position that has not been just the preserve of the US; it has split over into the UK, Europe and many of commodity producing countries. No more dramatically has this occurred than in the Banking sector. This is an area that dynamically changed in the latter decade and a half of the 20th century up until today. The Banks have become massive organisations where their roles had changed from being just Banks providing simple savings accounts, personal cheque accounts, lending, mortgage provision and asset management services either internally or externally into all doing organisations. They became Stockbrokers, Asset managers, Structured Product producers, lenders to corporate and private individuals, Venture capitalists etc but the bottom line is there is nothing that these organisations were not involved in and using the savers money to be involved. The role of a Bank is not one that many would have recognised twenty five years ago. The scope has changed and those that headed them knew very little of the structure or questioned it either. The most shocking thing is that everyone is suggesting that this is a unique event but in truth it is not. History is littered with failed banks with the most recent example before this crisis being the failure of Barings. A bank being lead by directors that never questioned the huge profits of Mr Leeson but when it failed it went bust and they didn’t see it coming. The truth is greed and ignorance of how the profits were being made was the root cause of Barings failure and it has been the root cause of the current failures. I challenge anyone to be a master of all the skills of a multifaceted global industry as complex as the financial services industry and be able to see the flaws. This is the problem. This is why the industry had separate segments to the whole overall structure. This meant that the specialists understood their own individual segment within the overall system. Thus the system remained functioning and all understood their role within this total system. Any stresses or strains would be noticed and suppressed by market participants within that segment. Within a corporate giant this is very doubtful because greed and performance is always the goal, not the smooth functioning of the market or whether it is extended beyond reason. Profit and achieving ever-increasing targets placed by out of touch senior managers, who don’t even understand how the profits are being made is the reason that these institutions can’t ultimately function in the longer term.
The direction that the politicians are leading us too, is still focused on saving the “too big to fail” institutions. This is completely opposite to what they should be doing, if they do not wish to take the entire western system to that of communism. The real solution would be to split these vast monopolies into segmented parts of a whole financial system and making each responsible for their own segment. This would help restore the equilibrium within markets and the functioning of markets would return because each segment would be able to develop an independent path to real price discovery rather than a skewed one to assist the parent bank. This issue is not just confined to the Financial services but to the entire structure of the US and UK system. The major companies that all compete have a vested interest to maintain the same pricing structures thus by default creating a monopolistic structure that removes competition. This, by default, is communism.
The main problem with this is that while the Russians and the Chinese have changed the structure of their systems over the last two decades to encourage competition, innovation, entrepreneurial spirit, this has been stripped from the Western capitalistic system. The growth of the all powerful companies has been removed choice whilst creating a false bubble that could not be controlled because within the massive organisations, it was not possible to be spotted or controlled because the senior managers and the boards were asking the wrong questions. They were not questioning how this was possible or even if it were sustainable, just how they could do more. The opening quote from Marx is prophetic because it is correct but it is a path that has taken a considerable time to arrive. Yet with irony, it is so close to the period at which it has been proved that communism as a system is also flawed and doomed to failure. Therefore, the capitalistic system is now teetering on the brink of communism as a default mode rather than addressing the real issue. This is simple and has been a function of every society until their eventual failure. There are three tiers to a successful society. Firstly, a ruling classes, secondly, an entrepreneurial class and finally, a working class. All of these are necessary parts of a successful economy. The ruling class is a necessity as it brings the stability of leadership to a society. This aspect has been stripped away as the West has moved to a fractured and fragmented leadership which has signalled opposite views of stability. In the West, leadership is coming from career politicians that have no interest other than to be elected, a vastly flawed position for any society. It is a short term goal without any long term horizons to cope with the current damaged system. What we need is a more long-term attitude from government and corporate leaders to restructure the entire system in a very retrograde step back into segmented market places, which are autonomous to their own needs and functioning. This is a necessity if we are to restore a balanced and orderly system. It is also a case that we need to start to dismantle these all powerful institutions whether they are banks or auto manufacturers or whatever, into smaller and more competitive functioning organisations. This is a critical point in the system that has been failing that we are now in a situation that we have to save these organisations and change them into State owned entities which by the very nature of this process will become ever more dysfunctional.
The middle classes or the entrepreneurial classes are an important facet to any correctly functioning capitalistic system. It is this class that has been rising in the BRIC over the last two decades. Admittedly by design and political choice, but it has been one of the hallmark aspects of the rise of the BRIC, the creation of this class has been a very necessary path to the success of these countries in the last decade and as such a correctly functioning capitalistic system. Whilst it is still perceived that the Governments remain Autocratic, this in itself is not entirely true because as the entrepreneurs have risen so has their influence into longer term government strategy and with this a move to a more definable democratic process. The social experiment in the West to a much less extent involved government remaining perpetually incumbent has created more loss of personal freedoms than should have been the case. This has been starkly demonstrated in the US and the UK in particular with a reduction in personal freedom during the past decade. This is at a point of the greatest boom and social mobility during the same period. This in itself should have been a warning signal that all was not well in the garden. It is clear that the recent financial turmoil has created a crisis of confidence and a destruction of wealth in these middle classes. Those are necessary for job creation and long term sustainable growth. This class has now been financial ruined in many instances and with it the ability to create innovation and creativity to save the situation. Fortunately, a counterbalance has been created in the form of the East and emerging economies to the destruction that has been created in the West. Thus a balance is still in place for the future but one that is as fragile as in the past.
The working classes in all economies are now facing the harsh realities of the current economic downturn. Due to large unemployment and constrained budgets but again this is where the BRIC stands better prepared as many of the middle classes are not as devastated as their counterparties in the West and as such we should be able to see the creativity and innovation still able to blossom even though in a much reduced capacity going forward. This is the crisis that faces the West. Rather than pumping the capital into the Banks and “too large to fail” institutions it should be directing its efforts to reinvigorating the middle classes. Thus the pressures that face the working classes can be alleviated with hope and opportunity through these actions. The longer that we stand in the path of this course the more exaggerated the downside of the recession will become.
At the core of this is a message and it is a clear one. Hope is borne of aspiration and ability to achieve. Political reform is borne out of aspiration and the ability to influence. Political stability and long term strategy of the future is borne out of the freedom of capital, the innovation and creativity of the individual, but most importantly the freedom of choice. Yet, within this message the realities of what a true capitalist society is based upon is perhaps a little clearer. It is a message that the Soviet Union and China embraced when communism failed but it is a message that the West failed to react to. They moved further and further to monopolistic structures that have now come to haunt them like a bad dream that caused the old communist regimes to implode.
Many have suggested that capitalism as we understand it is dead, with the Banks, governments and others that led it to its demise. Yet, this is patently not true! It is within the West to have the ability to construct and reassess the model but this requires vision and understanding of what is at the centre of the crisis. It has been as Marx suggested the very actions of the capitalistic system that has lead it to the brink of its own extinction. The question remains do we have the leadership currently to take us from the precipice and turn us back to what is a fully functioning and workable capitalistic solution. The truth is that the current incumbents are no different than those that led us here in the past and as such, it is a case that we will need to see truly visionary leaders to achieve the goal of recovering the system.
The true part of the statement that Marx made 142 years ago is that it is the natural path to communism. Yet, the statement that it will eventually arrive at communism is yet to be the tested. Communism requires the population to agree and the state to enforce. This posit has been proven to be intrinsically flawed. I believe and hope that the lessons of the failure and the embracing of capitalism by the previous communist systems will be the beacon that will allow the populations of the West to push for a return to capitalism with a small C and also without the monopolistic corporate entities. The most beautiful things in life are simplistic in design and form. This is where we should be heading in the current crisis.
We started with a quote and so I shall finish with a quote. “Most fundamental ideas of science are essentially simple, and may, as a rule, be expressed in a language comprehensible to everyone.” Albert Einstein
About the author
Richard Morrish is Head of Research at MIG Investments SA in Neuchatel, Switzerland. He has been a trader for the last 23 years for International Banks, hedge funds and himself. A regular contributor to CNBC for the last five years, Richard has also lectured on global macro hedge fund strategy and technical analysis. He has traded all asset classes from FX to Bonds to Commodities. He is regarded as one of the leading technical trading exponents in the UK and one of the most accurate predictors of markets. His charismatic style simplifies trading to its core elements, and he is a freeman and liveryman of the City of London, with 30 years experience in the City, and the LSE and LIFFE.