Nouriel Roubini draws our attention through an interview with Simon Constable in WSJ with a startling claim "Marxism was right about Capital Self destructing itself". Christopher Whalen promptly retorts that the claim is unsustainable. So who is wrong and who is right? I will attempt to answer this issue in an indirect manner.
From the seminal and celebrated work of Adam Smith, till today, the debate of which philosophy is right has engaged the attention of academia. Built into this debate are two essential components of modern industry - capital and labour. The steam vented, mostly looks at Capital and Labour as two opposing forces bent upon subjugating each other. Taking a break from this confrontational view, let me pitch in my take on the issue by dwelling upon both capital and labour.
Economic theory and common sense (I wish to believe they are same) suggest that capital and labour are both supplementary to each other and complementary to each other. It is possible to substitute man for the machine and machine for the man. It is also possible to put man and machine together and create value. One of the basic concepts of economics talks of something called production function. This function examines the issue and comes out with the analysis of costs in both substitution and complementing effects. It also throws light on the ideal combination of capital and labour to maximise efficiency. This combination produces value through production of goods. Goods get traded in the market and based on demand and supply price discovery takes place, profits/losses are made.
When economies were closed, the entire market was internal and in equilibrium. When economies started trading with each other and exchanged goods, there arose the philosophy of competitive advantage. Some economies produced certain goods more efficiently and some other economies produced different goods efficiently. Of course it is possible that two economies produce the same goods and compete for the same markets. In that case, the market decides the winner. So far so good. More efficient economies accumulated wealth, rose in prosperity, saved money. This phenomenon created its own complexities. As savings rose, cost of capital became cheap but cost of labour started rising (due to increased affluence levels).
The next barrier which opened up was free mobility of capital. When capital saw reduced returns in own economy and was free to move out seeking better returns it took away the lower paying jobs (which would not be taken up by the home economy due to unattractive wages) with it. Prosperous economies moved to a higher capital intensive industry and created jobs with higher wages, and, over a period of time a different segment of business called services arose which produced better paying jobs for the economies which exported capital. A similar cycle was at work in services which again differentiated in wages and low wage jobs continued to migrate out of prosperous economies. In addition, returns from capital supplemented the earnings of the capital surplus economies which elevated the prosperity levels even higher. This can be verified by seeing the investments in high end technologies by advanced economies which raises the productivity levels and more importantly skew the ratio in favour of capital. To create same number of jobs more capital was needed.
The problem started when capital surplus economies started exporting low wage jobs in service sector in return for high wage jobs. As long as this happened, i.e, loss of low wage jobs were compensated by gain in high wage jobs, the employment was in equilibrium. If the prosperous economies continued to save, invest and earn returns they remain safe from shocks. The imbalance starts when the prosperous economies reduce their level of savings and start increasing consumption. When that happens, the complimentarity between capital and labour starts disappearing. Wealthy economies suffer from loss of capital, reduced capability to make costly investments and consequent loss of jobs. (The ideal solution would be to never reach this stage - eg Germany. Germany has kept both blue collar jobs and white collar jobs with itself. A German worker has no problems in working with his hands).
Two solutions exist at this point. First, is the flexibility of the working class to switch over to low paying jobs to regain the correct labour capital mix. Remember, if that equilibrium is not obtained, goods produced will not have competitive advantage globally (as some one else will do it better with the ideal mix) and will lose out on price. Protection of local economy using tariff or non tariff barriers have their own consequences in the long run. I will not discuss those issues as I am assuming markets to be free of distortions. The second option is that the labour pool from advanced economies migrate out to new economies for taking up jobs in similar skill sets and conversely the labour from new economies migrate to advanced economies to take up low paying jobs. Remember again, the waves of legal and illegal immigrations precisely validate this issue.
The tragedy is that the first option does not work because people do not want to settle down for lower wages. And the second option is a no-brainer to start with. Therefore, structural imbalances continue to aggravate resulting in collapse of economies.
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