People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 16

April 27, 2008




Prabhat Patnaik

WHAT is meant by the term “inflation” is not always clear. It obviously refers to a rise in prices. But the question arises: a rise in which prices and in terms of what? Contemporary “mainstream” bourgeois economics pictures inflation as a rise in the prices of all commodities including labour power in terms of money. Since this economics underlies all official thinking covered by the “Washington consensus”, and hence, by implication, that of the Indian government, this is our official conception of inflation. The government itself may not recognise this, but that is only because of muddle-headedness.

Inflation in real life is very different from this. It refers to a situation where there is a rise in the money prices of commodities other than labour power relative to the money price of labour power. That is, it refers to a rise in commodity prices relative to money wages. This is why inflation is universally recognised as bringing misery and distress to vast masses of the working population (whose wages are not indexed to prices), while increasing ipso facto the share of profits. John Maynard Keynes the English economist had referred to this phenomenon as “profit inflation”. Inflation in real life is typically profit inflation, while contemporary “mainstream” economics (which goes under the name of “monetarism”) is theoretically incapable of cognising profit inflation.

The distinction between these two pictures of inflation is crucial. For instance a 10 percent increase in commodity prices, if accompanied by a 10 percent increase in money wages, is of much less social concern than a 5 percent increase in commodity prices with a constant money wage, even though the rate of price increase of commodities in the latter situation is lower. By the same token, a reduction in the rate of increase in commodity prices brought about by controlling money wages, is no solution to the inflationary process, since it amounts to achieving the same result as inflation does by other means, namely a redistribution from wages to profits.

Also by the same token it follows that a profit inflation is self-limiting. It arises because of excess aggregate demand, and it resolves this problem of excess demand by squeezing the demand of the working population, by raising prices relative to their money income. When it has squeezed demand sufficiently, excess demand in the economy disappears, and any further increase in commodity prices relative to money wages comes to a stop.


So, when Chidambaram and other government spokesmen triumphantly claim that the inflation rate is coming down (as they did on the basis of weekly figures recently), their triumphalism is utterly hollow. The rate of inflation of commodity prices is bound to come down if the money wage rate remains unchanged. The crucial question to ask in judging the success of inflation control is: has the real income of the working population declined relative to the initial (i.e. pre-inflationary) situation? If it has, then inflation has not been successfully controlled even if the rate of commodity price increase comes down to zero (as it inevitably will eventually). The fact that Chidambaram et al do not ask this question and only fetishize the rate of inflation is a clear indication that their perception of inflation is of the first, i.e. monetarist, kind, held by the Washington consensus, which sees inflation not as a rise in commodity prices in terms of money wages, but as a pari passu rise in commodity prices and money wages.

But this conception, as we have seen, precludes any immiserisation of the working masses. Hence the fact that the same government which sees inflation in this manner, also talks of inflation hurting the poor (as Manmohan Singh for instance did when he made his infamous remark about not “politicising” inflation), shows its muddle-headedness, the disjunction, of which it is itself unaware, between the theoretical baggage it has borrowed from Washington DC and the obvious social experience unfolding in front of it.

The foregoing has a very important implication. The problem of excess demand in the economy as a whole is invariably resolved under capitalism by squeezing the consumption demand of the working population. But inflation is only one possible way for achieving this; an alternative way is to restrict their money income relative to prices. In other words, an increase in prices relative to their money income can be achieved either through a rise in prices with an unchanging money income for them (i.e. profit inflation), or though a decline in their money income with an unchanging price (i.e. a wage deflation, or more generally an income deflation for the working population). Hence getting concerned only about commodity price movements is misleading. Even when commodity prices are steady, a capitalist economy may be handling excess demand pressures by other means which have exactly the same effect as inflation, namely an income deflation imposed on the working population.

What is more, this is the preferred way of handling excess demand pressures in contemporary capitalism, since any increase in prices, even when such an increase raises the share of profits, is destabilising as far as finance capital is concerned. It lowers the real value of financial assets (i.e. their value in terms of commodities); in extreme situations, holding commodities becomes preferable to holding financial assets altogether. But if the same effect of raising profit margins, as a means of combating excess demand pressures, is brought about by an income deflation imposed on the working population, then three birds are killed by one stone: the real value of financial assets vis a vis commodities is preserved; excess demand pressures are overcome; and the share of profits is increased which is desirable in itself for all segments of capitalists.

Indeed this is the way that contemporary world capitalism has been handling excess demand problems till now. And “globalisation” entailing the universal pursuit of neo-liberal policies has been the instrument for imposing an income deflation on the working population of the world. This may even be said to have been the major historic role of current globalisation in the evolution of capitalism, though capitalism, being a “spontaneous system” driven by its immanent tendencies, does not necessarily plan things out to suit its convenience.


But then the question may be asked: why does capitalism resolve the problem of excess demand only through demand compression on the part of the working population? Why can it not augment supplies? The answer lies in the fact that for a whole range of primary commodities, namely the agricultural primary commodities, capitalism does not directly possess the chief means of production viz. land, but has to engage in trade with peasants who do possess it. Of course, as long as Amerindians and other local inhabitants in the “new world” could be driven off their land and migrants from the metropolis could grab this land for cultivation, supplies could be augmented through such an extension of agriculture.

But where there is a settled peasantry that cannot be so easily driven off, it is not in the nature of capitalism to develop peasant agriculture; on the contrary its immanent tendency is to dispossess peasants of their land and other means of production over a period of time. And the squeeze employed on the peasantry by the immanent tendencies of capitalism in the current era is itself ipso facto an act of income deflation on the working population. (The term working population includes not just the proletariat proper, but also the peasantry, other sections of petty producers and agricultural labourers). As Lenin had said in Imperialism: “if capitalism could develop agriculture then it would not be capitalism”. The income deflation on the working population therefore, and hence the compression of the latter’s demand as a means of squeezing out agricultural primary commodities (as opposed to increasing the supplies of these commodities to meet the growing demand that would arise in the absence of such compression) is part of the immanent tendency of capitalism, which also manifests itself in the current epoch.



This is evident from global data over the last few decades. The period of the early seventies had witnessed a massive increase in primary commodity prices. The subsidence of this inflationary upsurge, with the exception of oil, was not because of any significant increase in supplies, but because of the massive income deflation imposed on the working population all over the world, especially over large tracts of the third world, owing to the working out of the process of globalisation. In fact if we take per capita cereal output for the world economy as a whole, it was 355 kilograms in 1980 (the output for the triennium 1979-81 taken from the FAO divided by the world population figure for the central year 1980), and declined to 343 kilograms in 2000 (calculated in an exactly similar fashion). But during this very period 1980 to 2000, the terms of trade for cereals vis a vis manufactures in the world economy declined by 46 percent!

Since this was a period which witnessed a reasonable growth of income in the world economy as a whole, and since the rise in per capita income should normally have increased the per capita demand for cereals, the fact that, despite the decrease in per capita cereal output in the world economy, the terms of trade moved against the cereals sector, and that too by as much as 46 percent, when the initial year 1980 was just a “normal” year and by no means a peak year for cereal terms of trade, clearly points to the massive income deflation that must have been imposed on the working people of the world during this period. This is what kept inflation at bay, and this was the contribution of “globalisation” with its universal pursuit of neo-liberal policies.

Before discussing the mechanism through which neo-liberal policies of the era of globalisation impose income deflation, let us ask the basic question: if income deflation of the working population of the world had kept inflationary pressures at bay, then why have they suddenly emerged? Or putting it differently, if income deflation of the working people and profit inflation have identical consequences by way of demand compression, and if the former, which finance capital prefers, was operating all these years, then why has profit inflation resurfaced?

The basic answer to this question lies in the fact that when it comes to peasant agriculture, demand compression through income deflation does not leave supplies unchanged over a period of time. In other words, what starts as a compression of demand via a deflation of incomes, while it relieves excess demand pressures in its immediate aftermath, undermines the peasant economy in various ways over time such that supplies too begin to get affected adversely. Persistent income deflation in other words becomes self-defeating. This self-defeating effect of income deflation would not have been apparent in the history of capitalism because of the “open frontier” in the “new world” referred to earlier. But when these “open frontiers” have been closed, the supply constraints that emerge because of income deflation, because of the undermining of the capacity for simple reproduction of the peasant economy, have no easy solutions. Further income deflation, apart from its explosive social consequences, can only worsen the situation. Much of the gloom in the capitalist world today based on the belief that the days of cheap food are over, derives from this basic phenomenon that the current inflation reflects in a sense a certain limit that capitalism, and not mankind, has reached.

(To be continued)