Was Marx Right?

ByAndrés Velasco & Luis Felipe Céspedes

SANTIAGO – In Santiago, Chile, a massive graffito by the exit ramp of a brand-new, privately-built urban freeway reads: “Marx was right!” Indeed, capitalist development begets its own contradictions, as the scribbling itself attests.

Recent months have been the spring – and winter – of Chile’s discontent: peaceful marches and protests, but also plenty of looting and violence. Just as in Hong Kong and Iran, Colombia and Costa Rica, Ecuador and Peru, Iraq and Lebanon, Sudan and Zimbabwe. And, despite these countries’ diversity, and that of the local incidents that triggered the unrest, pundits and media have settled into a comfortable narrative: “2019 was a year of global unrest, spurred by anger at rising inequality – and 2020 is likely to be worse” the commentary website The Conversation confidently asserts. The Guardian adds: “Not all the protests are driven by economic complaints, but widening gulfs between the haves and have-nots are radicalising many young people in particular.” Even the staid Financial Times concurs: “Inequality in ‘stable’ Chile ignites the fires of unrest.”

Yet many of these countries have long been unequal. And economic conditions are nowhere as dire as they were a decade ago, during the global financial crisis. So why are people taking to the streets now? The puzzle deepens if one notes that in Latin America inequality has been dropping fast, during precisely the same years it rose in the United States and the United Kingdom. According to the World Bank, between 2007 and 2017 the Gini coefficient (an index of income distribution, where zero represents perfect equality and 100 absolute inequality) fell in every Latin American country now erupting in protests – including by a massive eight points or more in Bolivia and Ecuador.

Here is where a Marxian emphasis on progress and its ensuing contradictions provides much-needed help. Karl Marx and Friedrich Engels, recall, marveled at capitalism’s “constant revolutionizing of production,” but noted that this meant “uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation.”

Consider higher education. In many emerging economies – Brazil, Chile, and Ecuador among them, but also Turkey, Lebanon, and Hong Kong – university enrollment has soared in recent decades. With the supply of skilled labor growing more quickly than demand, the gap between the earnings of the university-educated and the rest narrowed. As a result, different measures of income inequality fell.

More education, higher skills, less inequality – what’s not to like?

Not much, unless you belong to the generation caught in the transition. Young people who went to university in the last quarter-century – often to new institutions whose standards were not exactly Ivy League, but which charged high fees nonetheless – ended up earning less than they expected. The result has been a generation of educated, indebted, and often irate young men and women.

Moreover, as the historian Niall Ferguson recently reminded us, surges in access to higher education, coming on the heels of prolonged periods of peace and prosperity, have often coincided with mass street protest. Education attunes you to injustice, and prosperity means that protesting does not jeopardize your livelihood. It happened in the 1960s in Europe and the US. It is now happening worldwide, faster and more intensely than ever, thanks to mobile devices and social media.

Or consider capital accumulation. The definition of a poor country is one in which productive capital is scarce and weak credit markets mean capital cannot be borrowed to make businesses grow. Optimal development policy thus entails keeping wages and taxes low early on, so that firms can use their profits to fuel investment and growth. As the Princeton University economists Oleg Itskhoki and Benjamin Moll have recently shown, that is true even when a policymaker cares only about the welfare of workers, who will benefit from stronger productivity and higher wages as capital accumulates.

But the 1% do not get a free ride forever. Eventually, Itskhoki and Moll argue, redistribution trumps accumulation. At that point the 1% percent must learn to live with lower profits and a higher tax burden – unless, that is, they choose to use their political might to fight that change.

And so it has been with many emerging economies. From South Korea to Singapore, and from Mexico to Chile, very poor countries grew prosperous in an environment of low taxes. But politics may have caused some of them to delay the switch to redistribution for far too long. Mexico, for example, is an upper-middle-income country, yet tax revenues are a paltry 16% of GDP, less than half the OECD average. In Chile, the ratio is 21%, yet it has been stagnant for nearly a decade. The result is not only insufficient social insurance for the rising middle classes, but also a dearth of spending on innovation and infrastructure, which causes growth itself to falter. The result is likely to be social unrest, which has come to Chile and may reach Mexico once the new government’s honeymoon ends.

Competition policy is a third example of the Marxian dictum that capitalist success begets its own failures. Economists Daron Acemoglu, Philippe Aghion, and Fabrizio Zilibotti sketched the cycle in an influential 2006 paper. When a country is relatively poor, allowing firms some monopoly rents accelerates capital accumulation without harming innovation, because firms simply adopt technologies imported from more advanced economies. But once a country prospers and reaches the world technology frontier, further growth requires innovation, which in turn requires competition.

Bottom line: successful emerging economies should adopt aggressive anti-monopoly policies if they wish to remain successful. Many, including Mexico and Chile, have. But here’s the rub: the new, more stringent standards will reveal unending collusion scandals, which will fill the headlines and ignite public anger long before more competition produces the innovation and higher incomes to placate that anger. The price of success in fighting monopoly may be more, not fewer, street demonstrations.

Now, Marx and Engels did not just claim that capitalist development engenders its own contradictions. They also concluded that those contradictions could be overcome only through the “forcible overthrow of all existing social conditions.” The current wave of protesters has not overthrown much yet (except for Bolivia’s president, who was found to have stolen an election). It is up to governments to carry out – and soon – the reforms that can prove Marx and Engels wrong.

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Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. Luis Felipe Céspedes, Professor of Economics at Universidad Adolfo Ibáñez, is a former economy minister of Chile.