This Time It's Different?

Wralf, I am also not an economist so take my comments with a large pinch of salt as they say.

I struggle with the same juxtaposition. There is probably a timing factor that needs to be taken into account. We've all heard about the K-shaped economy. We also know financial conditions are tightening in most developed markets. That means that, everyday, on the margin, more and more households/businesses fall into the lower leg of the K. We also see it in the stock market with the terrible breadth. My take is that, for a majority of the economy (nearly everything not AI), costs are increasing faster than revenue and profit margins are under pressure. The clock is ticking.

In my mind the key question is, will the productivity gains and growth from AI come fast enough to avoid the lower economic activity that is likely to result from the global rising interest rate environment we are in. I suspect we are heading for an inflection point in the not-so-distant future when the market gets a lot more volatile as it tries to figure out the answer to that question. Whoever gets the answer right will have some very nice opportunities during the high volatility period. Hopefully we can all help each other figure out the proper path sooner than the proverbial market. ;-)

For me, this is a fascinating subject. I just retired from a 30 something year IT career and have watched first hand how AI and automation eat more and more of the pie.

I think at its core, this article is about the economic consequences of machines making machines, so I asked a machine (Google.AI - slightly ediited and formated below) to process the information as seen through a Marxist lens. I will leave to the reader to draw their own conclusions, but in my opinion, even if history might not repeat itself, it often rhymes.

Google.AI :

From a Marxist perspective, the analysis of automation, deflationary abundance, and exploding debt presented in the article represents the core, systemic contradictions of capitalism—not just cyclical or technical hurdles to be managed with portfolio allocation.

Karl Marx and Friedrich Engels would interpret the core themes of the article through the following lenses:

1. "Robots Making Robots" and the Falling Rate of Profit

The article highlights a potential future where AI and robotics dramatically lower production costs and increase the supply of goods.

• The Marxist View: Marx argued that the value of a commodity is determined by the socially necessary labor time required to produce it. Machines (constant capital) do not create new value; they only transfer their own value to the product. Only living human labor (variable capital) produces surplus value (profit).

  
  

• The Contradiction: If "robots build the robots that build almost everything else," human labor is largely eliminated from production. While this gives early adopting capitalists a temporary advantage, across the economy it triggers what Marx called the Tendency of the Rate of Profit to Fall. Capitalists drive down production costs to zero, but in doing so, they inadvertently destroy the very source of capitalist profit.

  
  

2. Deflationary Abundance vs. Underconsumption

The article touches on a "deflationary boom" or "age of abundance" but notes a user comment asking what happens when people cannot afford these products.

• The Marxist View: This perfectly illustrates a classic crisis of overproduction (or underconsumption). Under capitalism, automation does not free the working class; it displaces them, creating what Marx called the "industrial reserve army" of the unemployed.

  
  

• The Contradiction: Because workers are displaced by robots, their purchasing power drops. Capitalists produce an unprecedented abundance of cheap goods, but because they have stripped the working class of wages, there is no one left to buy them. Abundance under capitalism leads to poverty amidst plenty.

  
  

3. The Exploding Debt and Capital-Intensive Present

The author notes that building this automated future requires an extraordinary, capital-intensive present funded by massive corporate and sovereign debt.

• The Marxist View: Engels and Marx observed that when the real economy faces limits on profitability, capital retreats into the financial sphere. Debt expansion and financialization are mechanisms used by the bourgeoisie to artificially sustain economic growth when productive investments yield diminishing returns.

  
  

• The Contradiction: This massive accumulation of fictitious capital (debt) cannot solve the underlying stagnation; it merely kicks the crisis down the road, ensuring that the eventual correction or collapse is far more severe.

  
  

4. The "All-Weather Portfolio" as Bourgeois Illusion

The article concludes by recommending that individual investors buy an "all-weather" static portfolio (stocks, bonds, gold, cash) to protect their wealth across Charles Gave's four quadrants.

• The Marxist View: This is a classic bourgeois attempt to find an individualist, financial solution to a collective, systemic problem. An all-weather portfolio assumes that the underlying capitalist relations of production will permanently endure.

  
  

• The Marxist Conclusion: The "four quadrants" are merely symptom charts for a dying economic order. The conflict between rapidly advancing productive forces (AI and robotics) and outdated relations of production (private ownership and wage labor) cannot be hedged away. It can only be resolved by transitioning away from capitalism entirely.

Let's break down both concepts to see how Karl Marx and Friedrich Engels provide a precise blueprint for analyzing today’s tech economy...

1. Constant vs. Variable Capital in the AI Era

To understand how Marx viewed technology's role in creating value, we have to look at his breakdown of capital in Das Kapital. He divided the capital invested in a business into two distinct parts:

┌───────────────────────┐

│ CONSTANT CAPITAL (c) │

├───────────────────────┤

│ • AI Hardware/Chips │

│ • Data Centers │

│ • Electricity │

├───────────────────────┤

│ Transfers existing │

│ value to the product. │

└───────────────────────┘

┌───────────────────────┐

│ VARIABLE CAPITAL (v) │

├───────────────────────┤

│ • Software Engineers │

│ • Human Prompt- │

│ • Engineers/Labor │

├───────────────────────┤

│ Creates NEW value and │

│ surplus value (profit) │

└───────────────────────┘

Constant Capital (c)

This is the money spent on the non-human means of production. In today’s terms, this includes Nvidia H100 chips, server racks, real estate for data centers, cooling infrastructure, and electricity.

• The Marxist Rule: Marx argued that constant capital is "dead labor." It does not generate new value. It merely transfers its own wear-and-tear value to the final commodity over its lifespan. If a supercomputer costs $1 million and safely operates for 1,000 hours, it can only add exactly $1,000 worth of value to the software generated during each hour of operation.

  
  

Variable Capital (v)

This is the money spent on hiring human labor power (wages). In the AI industry, this represents software engineers, data annotators, prompt engineers, and maintenance crews.

• The Marxist Rule: Variable capital is the only source of surplus value (s). Human labor power is unique because it can produce more value in a day than it costs to buy (wages). The difference between the value the human worker creates and the wage they receive is the capitalist's profit.

  
  

The AI Dilemma

When tech giants dump $220 billion into constant capital (c) while aggressively trying to minimize variable capital ($v$) through automated coding and AI agents, they upset this delicate ratio.

Marx called the ratio of constant to variable capital ( c/v ) the Organic Composition of Capital. As this ratio rises (more machines, fewer humans), the rate of profit naturally shrinks because there is less living human labor to squeeze surplus value from. Tech companies suddenly find themselves owning massive, incredibly expensive digital factories that produce near-zero margin software, choking their long-term profitability.

2. Elon Musk’s UBI vs. Engels’ Classless Society

The threat of mass job displacement from "robots making robots" has led silicon valley billionaires like Elon Musk to advocate for Universal Basic Income (UBI). While this sounds progressive, Friedrich Engels would view UBI and a true classless society as fundamentally opposing forces.

Elon Musk’s Universal Basic Income (UBI) vs. Friedrich Engels’ Classless Society (CS)...

Ownership of AI/Robots -

UBI: Private Property Kept in the hands of oligarchs, tech conglomerates, and private corporations.

CS: Seized by the working class and democratically managed by society for the common good (Socialized Ownership).

The Role of the State -

UBI: "Bread and Circuses"; the capitalist state distributes a cash baseline to prevent riots, homelessness, and total economic collapse.

CS: Withering Away; the state ceases to be an instrument of class rule and naturally dissolves into a simple administrative body.

Human Dignity & Work -

UBI: Muted Consumption; Citizens become permanent consumers of corporate goods, surviving on corporate-funded state stipends.

CS: True Liberation; abolition of wage labor allows humans to work creatively, dividing necessary labor minimally among all.

Engels’ Critique of UBI

Engels would diagnose Musk's UBI as a desperate mechanism of "State Capitalism." If robots do all the work and private corporations pocket all the profits, the capitalist system faces a systemic wall: workers have no wages, meaning they cannot purchase the commodities being produced.

To prevent a violent proletarian revolution, the capitalist class uses UBI as an economic pacemaker. It taxes a portion of corporate profit to hand cash back to the displaced masses, solely so those masses can hand it right back to the corporations for food, housing, and technology.

For Engels, UBI does not end exploitation; it merely subsidizes it. It keeps the working class dependent on the goodwill of a corporate-dominated state.

The Revolutionary Alternative

Instead of giving workers a "handout" while tech billionaires retain total control over the means of production, Engels argued that the working class must seize control of the robots and data centers themselves.

Once automated production is collectively owned, the goal shifts away from maximizing profit and toward minimizing human toil. If robots can do 90% of the work, the work week for everyone drops to 4 hours, rather than 90% of people facing unemployment while the remaining 10% work 80-hour weeks.