Roubini and Magnus on Underconsumption and Marx

A response to Mike West’s question on Roubini’s remarks, “including whether he has his Marx ‘right’”

by Andrew Kliman, author of Reclaiming Marx’s “Capital”: A refutation of the myth of inconsistency.


In a comment following another article in With Sober Senses, Mike West asked me about Nouriel Roubini’s recent, widely-publicized comment on Marx being right.  I started to reply in the comments space, but my reply became so long that I decided to turn it into a separate article, namely this one.

Mike wrote:

On or about Aug. 12, 2011, in an interview with the WSJ, N. Roubini (aka ‘Dr. Doom’) stated (beginning around 5:09/22:01) that:

“Karl Marx had it right. At some point, Capitalism can [self-] destroy itself. [That’s because] You cannot keep on shifting income from labor to Capital without having an excess capacity and a lack of aggregate demand. That’s what has happened. We thought that markets worked. They’re not working. The individual can be rational. The firm, to survive and thrive, can push labor costs more and more down, but labor costs are someone else’s income and consumption. That’s why it’s a self-destructive process.”

(rough transcription taken from:


I would very much like your comments on Mr. Roubini’s remarks, including whether he has his Marx ‘right’.


Mike West


My reply:

Hi Mike,

Unfortunately, I don’t think Roubini is right, either on the economics or on Marx. More recently, George Magnus, an economic adviser or consultant to UBS, a big investment firm, got a lot of play for saying the same thing:

“The more people are relegated to poverty, the less they will be able to consume all the goods and services companies produce.

“When one company cuts costs to boost earnings, it’s smart, but when they all do, they undermine the income formation and effective demand on which they rely for revenues and profits. …

“As Marx put it in Kapital: ‘The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.'”

On the economics: if profits rise at the expense of wages, there will be a drop in demand for goods and services IF the extra spending due to the extra profit–extra productive  investment spending by businesses, extra personal consumption of dividend recipients, extra government spending funded by extra business taxes–isn’t big enough to offset the loss in spending due to the fall in wages. But if the extra spending due to extra profit IS big enough, there won’t be a drop in overall demand. So it’s wrong to say that demand has to drop.

Now, underconsumptionists typically contend that the volume of productive investment spending is restricted by the demand for consumption goods, since “ultimately” the productive investments (in equipment, factories, office buildings, etc.) produce more consumer goods. So if consumption demand is depressed because wages are low, this must–they claim–eventually lead to depressed investment spending.

This is just incorrect–both theoretically and empirically.

Theoretically, as Marx’s schemes of reproduction in Capital, vol. 2 were the first to show, it isn’t the case that all productive investment results in more consumer goods, not even “ultimately.” Some iron is used to produce steel that is used to produce mining equipment that is used to excavate iron, etc., etc.

iron –> steel –> mining equipment –> iron …

So limited growth of consumption demand doesn’t set any insurmountable limit to the growth of productive investment demand. A company can demand more steel because it correctly anticipates bigger demand for mining equipment, and another company can demand more mining equipment because it correctly anticipates bigger demand for iron, and a third company can demand more iron because it correctly anticipates steel, etc., etc.

And because productive investment demand isn’t “ultimately” restricted  by the volume of personal consumption demand, total demand in the economy is likewise not “ultimately” restricted by it.

Empirically, as I’ve shown in an article in With Sober Senses, businesses’ productive investment demand has increased almost five time as fast as consumption demand in the U.S. over the last three-quarters of a century. If there were something keeping it from growing faster “ultimately,” it surely would have kicked in by now.

On the interpretive issue, Magnus’ quote from Marx–which is also what Roubini seems to have in mind–is very famous, but it’s taken totally out of context. (The full passage is here.)  Let me quote from my book on the underlying causes of the Great Recession that will be coming out in a few months:

Although underconsumptionists dismiss the implications of Marx’s reproduction schemes, many of them nonetheless argue that their theory is rooted in his work. They (for example, Sweezy 1970: 177; Desai 2010: 115) are particularly fond of taking out of context a sentence in which Marx (1991a: 615) writes, “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.” Let us put this sentence back in the context of the paragraph in which it appears.

Marx notes that if “the whole society [were] composed simply of industrial capitalists and wage-labourers,” total income (= net output) would be divided between the profits of the former and the wages of the latter. If we assume that workers spend their whole income on consumption goods and services, then a lack of demand, and hence “a crisis[,] would be explicable only in terms of” two things. First, all income might be spent on goods and services, but there could be a lack of demand in some branches of production (and too much demand in others)—“a disproportion in production between different branches.” Secondly, industrial capitalists’ demand might be less than their accumulated profit; in this case, there would be “a disproportion between the consumption of the capitalists themselves and their accumulation.” [Marx seems to be referring here to the sum of their personal consumption demand and their productive consumption demand (investment demand). Their personal consumption demand is always less than their accumulated profit, but a crisis would occur only if their investment demand were not great enough to offset this gap.] “But as things actually are, [demand] depends to a large extent on the consumption capacity of non-productive classes; while the consumption capacity of the workers is restricted” (Marx 1991a: 614–15). In other words, workers receive only part of the income that isn’t profit, while third parties who are neither capitalists nor workers but instead belong to “non-productive classes,” receive the rest, and there would be a crisis if the consumption demand of the latter were significantly less than their income.

Thus, “The ultimate reason for all real crises”—besides the two reasons that Marx referred to in the same paragraph, only two sentences earlier—“always remains the poverty and restricted consumption of the masses” in the sense that this creates the possibility that third parties, who receive income that the workers would otherwise receive, might not spend it all on goods and services. Or, if we set aside, as something other than “real crises,” those caused by the first kind of disproportionality, then the workers’ restricted consumption is the ultimate reason in the sense that this creates the possibility that industrial capitalists and third parties receive some income that they might not spend on goods and services. And these possibilities in turn “imply the possibility of crises, though no more than the possibility. For the development of this possibility into a reality a whole series of conditions is required” (Marx 1990a: 209, emphasis added).

Nothing in these passages even hints at the idea that crises are caused by chronic structural problems in capitalism that result from persistently inadequate personal consumption demand. And nothing in them even hints at a denial that investment demand can grow more quickly than consumption demand, even in the long run. Marx is certainly not* “frontally challenging any idea that the ‘fundamental’ cause of capitalist crises lay in some separate sphere of production” (Desai 2010: 115), since the passages only discuss factors that make crises possible; they do not discuss the fundamental conditions that turn “this possibility into a reality.”

The leading underconsumptionist of the twentieth century noted that the “ultimate reason” sentence—a single out-of-context sentence in a somewhat opaque paragraph of a manuscript that Marx did not prepare for publication!—“appears to be Marx’s most clear-cut statement in favor of an underconsumption theory of crises” (Sweezy 1970: 177). If that is the best evidence that Marx was an underconsumptionist—and it is—I would hate to see the other evidence.


Desai, Radhika. 2010. “Consumption Demand in Marx and in the Current Crisis,” Research in Political Economy 26 [The National Question and the Question of Crisis], 101–43.
Marx, Karl. 1990a. Capital: A critique of political economy,Vol. I. London: Penguin.
—— 1991a. Capital: A critique of political economy, Vol. III. London: Penguin.
Sweezy, Paul M. 1970. The Theory of Capitalist Development: Principles of Marxian political economy. New York: Modern Reader Paperbacks.

1 Comment

  1. Michael Bleaney’s excellent book: Underconsumption Theories (1976), goes through the evidence and concludes the same, Marx was not an underconsunptionist. This doesn’t make one an adherent of Says’ Law, that supply and demand always match, and Marx slated it as “childish babble” as it is perfectly possible for effective demand to fall in a money economy because money can be hoarded. But this is temporal (like now when firms are awash with cash!) and, as you say, at other times the fall in wages is offset by the rise in capitalist consumption and investment.
    As I understand it, Marx’s tendency of the rate of profit to fall will hold even if Say’s Law holds.

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