History repeats itself, first as tragedy, second as farce?

Olivér Kovács, Research Fellow, ICEG European Center

195 years ago, Karl Heinrich Marx was born on this day. Among other things, Marx stated two things: (i) history repeats itself; and (ii) rich is just getting richer, while the poor become even poorer over time.

Concerning the first tenet, recent financial turmoil which has been transmogrified into an once-in-a-lifetime economic crisis also reflects the view of Olivier Blanchard, who emphasised that after the devastating effect of World War II, his generation had a predilection to think about the future as a world with permanently improving economic conditions, merely. As the Great Recession is here to stay, whose downturn seems to be lasting longer than the previously occurred crises in the economic history (Fatás – Mihov, 2013), the Marxian historical resurgence, in other words, the Nietzscheian eternal return principle has become in order without any comic feature. 

There were voices advocating that the crisis is probably able to kill capitalism itself. Apart from the fact that Joseph Schumpeter himself was not sure about the sustainability of the capitalism either, growing income inequality is often cited as one of the main roots of the evolving crisis. As we also noted in the March 2013 issue of News of the Month series, „[…] Plethora of authoritative studies pointed out that income inequality had been rising and it has been affected even more negatively by the crisis. Poorer people became indebted, so the growing income inequality was one of the most pivotal leitmotifs behind the extensive willingness to borrow and thus accumulate private debts [...]”.

Concerning the second tenet, despite the fact that income inequality is a crucial problem that is linked to the issue of poverty, if we take into account the fact what Angus Maddison deciphered, namely that the predominant part of the property ever created by mankind (80-90%) has been produced in the last 90-100 years, one can conclude that Marx was not undoubtedly right. The economic growth and development can trickle down through complex and non-linear processes unless there are despotism and dictatorship which tend to lead famine. This was documented in case of Kenya by Hans Singer in the early 1970s who was a student of John Maynard Keynes and who later became one of the most prominent scholars of economic development. The Chronic Poverty Research Centre of the United Nations also revealed that the Millennium Development Goals with regard to poverty reduction (halving poverty) by 2015 is achievable. Even in Africa, the poverty has been decreasing and losing ground (see Sala-i-Martin and Pinkovskiy, 2010).

For sure, sovereign debt crisis triggered by recent crisis and the crisis management itself will not evaporate in the short term, decreasing public debts will easily become a decade-long task, however, consolidating to the numerical levels in the European Union (stipulated by the Maastricht Treaty and the Fiscal Pact) without considering the demand conditions (which is affected heavily by income inequality, tighter liquidity constraints etc.) would be a Hayekian fatal conceit in terms of growth consequences. Policymakers should therefore follow a more cautious way of stabilisation if they are to avoid stabilisation that is more like destabilisation. The big question is whether Europe can find the new growth model pursuing for instance the sustainable global golden age tailored towards green global economy promoted by Carlota Perez (Perez, 2010).

Even though history seems to repeat itself by conveying the message that development and decay are spontaneous and non-linear processes, governments always have the opportunity to emit right signals in right time in the right measures through credible fiscal consolidations being armed with pro-growth measures as well and a variety of economic policies geared towards longer term development.  

This post features the author's personal view and does not represent the view of ICEG European Center.