Jeremy Grantham Suggests Marx Was Right

MarketWatch's Al Lewis had an interesting article on Feb. 29, 2012 on how Boston-based investment firm GMO LLC's co-founder Jeremy Grantham recently suggested in a quarterly letter to investors that Karl Marx and Friedrich Engels were right regarding the development of capitalism. Grantham: "Capitalism, by ignoring the finite nature of resources and by neglecting the long-term well-being of the planet and its potentially crucial biodiversity, threatens our existence." Far from being the archetype of a left-wing revolutionary, Grantham studied economics at the University of Sheffield and completed an MBA at Harvard University. GMO LLC manages $97 billion, "about half the market value of Berkshire Hathaway, Inc."

Grantham wrote in the letter that "Marx and Engels certainly got the part right about globalization and the supranational company increasing the power of capital at the expense of labor." Thus, globalization and the supranational company "would...offer the capitalists more rope to hang themselves with or, rather, to be hung with, in the workers' revolution." Such rope "would be bought from briskly competing capitalists, eager till the end for a good deal."

Per Lewis' discussion, Grantham believes that "capitalism does almost everything better than any other economic system" save for "its two or three main flaws" that are "potentially fatal and have gone largely unaddressed." Lewis wrote that "[a] sustainable economic system...can't be based on ever-increasing debt, corporations can't be allowed to run governments and loots treasuries, and 'growth at any cost' is a recipe for planetary suicide."

Lewis eloquently summed up Grantham's points: "Capitalism too heavily discounts the future value of cash flows as it seeks to raise debts", the capitalist system focuses too much on profits while ignoring fundamental humanistic interests, "the more people borrow, the more they just gamble", "Washington is becoming a corporate subsidiary" by using money to buy political influence, and "governments must step in" in order to deal with social and environmental problems including the depletion of natural resources. In essence, from Grantham's perspective, problems with capitalism come down to debt, politics, environmental damage, and inhumanity. The points that Lewis noted in his commentary that really catch one's eye include (1) how Grantham wrote that "Capitalism in general has no sense of ethics or conscience. Whatever the Supreme Court may think, it is not a person" and (2) how "economic theory ignores natural laws" in that "capitalism wants to eat into ... limited resources at an accelerating rate with the subtext that everyone on the planet has the right to live like the wasteful polluting developed countries do today."

Regarding systemic flaws in capitalism, Grantham wrote that "capitalism has gone through a Darwinistic series of trials and errors, which still continues. For the time being, capitalism has tuned itself to rapid growth at almost any cost." Grantham later continued, "The reader can easily see how a corporation's outlook on potential future damage might be a painful mismatch with that of ordinary individuals and society at large. The consequences of this not only can be disastrous but probably will be."

I discussed on Feb. 17, 2012 how "framing problems in contemporary Western capitalism from a historical perspective can help in determining the financial system's stability going forward." I wrote, "Crucial flaws in Western capitalism go back to the ideas of (1) ecological sustainability to ensure that the planet will not be destroyed and (2) regulation of the market given that capitalism-in-theory is quite different from capitalism-in-practice." In the current Zeitgeist of global capitalism moving forward, these two themes appear to be at the forefront of the debate.

Though the debate (at least in the US) regarding capitalism and Marx's ideas can get clouded at times owing to historical attitudes and political emotions, in order to properly analyze Marx's ideas regarding capitalism, we have to separate the politically-ideological from the economic. I for one have fallen into this trap in the past and my perspective has changed after reading Marx's and Engel's discussion on historical materialism and commentary from thinkers like Louis Althusser, Gerald Cohen, and Joseph Schumpeter. To be fair, I attribute cultural misconceptions regarding Marx in the US in part to how so-called "Marxism" is perceived in the American political discourse and in part to the American educational system. We don't really study or talk about Marx and Engels in American culture. Even in Gregory Mankiw's "Principles of Economics", a standard economics textbook, Karl Marx makes only two appearances. In one portion of Mankiw's "Principles" (in an included opinion piece), Steven Landsburg concedes that "Marx was right" with respect to the idea that "capital is the embodiment of past labor". In any event, if sales of Capital are indeed increasing in light of the global financial crisis, perhaps Marx should be a more mainstream source when it comes to academic economics in the US. As I've previously written, "It would appear that from my experience growing up and going to school in the US, the two most prominent works regarding Marx's theories seem to be...George Orwell's 'Animal Farm' and '1984'. Even so, in due justice to the thinker, I think framing the current global financial crisis in light of Marx's philosophical ideas (while unhinging the ideas from their respective historical and ideological undertones) can be beneficial."

One major confusion with respect to Marx's ideas regarding capitalism is the mistaken belief that Marx argued that socialism ought to be pursued on ethical grounds. Contrary to what some may believe, the crux of Marx's historical materialism is about history, not ethics. Even the Stanford Encyclopedia of Philosophy takes note of this: "The issue of Marx and morality poses a conundrum... Despite expectations, Marx never says that capitalism is unjust. Neither does he say that communism would be a just form of society." Thus, "[a]rguably, the only satisfactory way of understanding this issue is, once more, from [Gerald] Cohen, who proposes that Marx believed that capitalism was unjust, but did not believe that he believed it was unjust."

Per Lewis' aforementioned analysis, "Where Marx and Engels got it wrong was in thinking workers would unite. [Grantham:] 'It's going to be hard to have a workers' revolution with no workers. Organizing robotic machine tools will not be easy.'" But even this commentary seems to overlook Marx's idea of the proletarian, who is not necessarily employed, and the "reserve army of labor" whereby "surplus population" helps to keep wages in check to the benefit of capitalists. Just because robots exist does not mean that a "revolution" of workers has become obsolete. In contrast, I recently discussed that perhaps a more viable perspective on the transition from capitalism to socialism rests on the development of the productive forces, i.e., technology. Even from Cohen's interpretation of Marxian economics and Marx's historical materialism, capitalism itself is not to be torn down for its own sake. Rather, capitalism is a bridge of human civilization linking feudalism to socialism; it is via capitalism that socialism becomes feasible. Once the productive forces become so developed in capitalism to the point that they can no longer be developed, the superstructure becomes fettered and a new superstructure emerges in the womb of the previous superstructure. In other words, socialism grows in the womb of capitalism just as capitalism grew in the womb of feudalism.

Whereas the political debate in the US in terms of Marx's ideas can become clouded in light of ethical, ideological, and semantic considerations, the operative question of Marx's analysis is whether we can divide history into separate historical-economic superstructures. Will capitalism always exist? I think it is fair to say that humanity has gone from primitive communism (with hunter-gatherer communities) to ancient society (beginning 10,000 years ago) to feudalism to capitalism. We can even see from fictional societies glimpses of historical progression, e.g., in "Game of Thrones" and "Lord of the Rings", Westeros and Middle-Earth seem to reflect the feudalistic superstructure, i.e., the societies have not yet achieved the productive forces necessary for capitalism, but have progressed from hunter-gatherer societies. While some may seek to justify laissez-faire capitalism on ethical grounds in the spirit of liberty and man's rights, the idea that capitalism would have been the most ethical form of economy for hunter-gatherer communities and ancient Greeks and Romans becomes problematic in taking into account the natural development of the productive forces. From this perspective, something will most likely have to come after capitalism, and we may be seeing hints of this transition in the contemporary period.

Per my previous commentary in "Blueprint for the Future: Part 2", "As for what the future holds ... most likely, the 'socialism' and 'communism' of the future as per Marx's historical materialism will look nothing like what most Americans may regard today as socialism and communism." In my previous analysis, I used the example of a small colony on Mars or a community in outer space on a Stanford torus -- with a population of, let's say, 1,000 to 5,000 individuals: "[S]uch an existence would somewhat resemble primitive communism and yet owing to high-tech advancements, the scenario would not be primitive communism... Humanity would have evolved past capitalism by that point; capitalism would no longer serve the economic ends of mankind in such living circumstances."

If you can visualize a colony on Mars with various robotic implements, computerized mechanisms, material replicators, automated medical implements, communal and economic living quarters, and sustainable greenhouses, I think that is a fair conception of what communism could look like in the distant future. That being the case, "full communism" may be 500 to a thousand years away. From my perspective, I think a fair and realistic socio-economic forecast would be to say that Marx's vision of socialism is roughly 100 to 300 years away from realization and Marx's vision of communism is between 500 to 1,000 years away from realization. Even then though, one has to wonder if the progression of historical materialism could somehow reverse itself, i.e., might a civilization that has developed to a point of advanced capitalism revert to feudalism? In light of the development of the productive forces, Cohen's analysis seems to suggest that the answer is "no."

Going back to Grantham's letter, Grantham suggests "your grandchildren have no value" in light of increasing debt burdens and growth. That being the case, Grantham writes, "Try to contain natural optimism. Optimism has probably been a positive survival characteristic." While Grantham addressed his label as being a "notorious bear", he also wrote that investors should "believe in history." Grantham: "History repeats and repeats, and forget it at your peril." Grantham's discussion seems to suggest that not only can investors believe in history, but they can also believe in historical materialism.

In this light, per Grantham's own words, I think there is reason to be optimistic going forward. I myself admit that whereas I am not always optimistic, I try to be the most optimistic of the pessimists. As for reasons to be optimistic, even if capitalism has some crucial flaws, we have to recognize capitalism's place in the course of history...the "historical task" of capitalism being the growth of wealth and the development of the productive forces whereby a new superstructure (per Marx, socialism) takes the place of capitalism. However, humanity has yet to reach that point, i.e., there is still substantial room for the productive forces to be developed. In other words, there remains the strong potential for robust capitalist growth into the future in the global marketplace. Possible examples of where productive forces can be developed in the near future include (1) the construction of efficient, economic housing on a large-scale for global citizens, (2) the mainstream ability through technology to work from home thereby decreasing the dependency on gasoline, (3) possible aquaponics and greenhouse systems for sustainable food production, (4) home automation, (5) mass transit systems in the US, (6) the development of solar energy with home and commercial applications, and (7) the development of water purification systems to help meet the global needs of the future. These are viable avenues for potential growth in the marketplace into the future. If, as Grantham suggests, capitalism threatens our existence, humanity still appears to need the capitalistic superstructure in order to grow out of capitalism.

As for debt, currencies, politics, environmental damage, those are pertinent issues today, but hopefully, those issues will be worked out in a functional manner (courtesy of mankind's social nature and the desire to survive) and future generations can "believe in history" and take proper steps to move forward. Thus, in light of Grantham's discussion and deficiencies in capitalism, though one might be bearish in the short-term, there are reasons why we should all be optimistic in the long-term.