People's Democracy

                                                            Capitalism And The Contemporary Inflation

Prabhat Patnaik

THE explanation of the contemporary inflation in terms of supply shortages, arising as a result of the income deflation imposed on the peasantry, is not one that is commonly accepted. The common explanations doing the rounds are the following four: the first highlights speculative behaviour. Speculators, it is argued, are moving to commodities, because of the financial crisis which has made financial assets unattractive, and also because of the weakening of the dollar, which has denied the wealth holders in the capitalist world, for the present, a stable medium of holding wealth. While there is much in this argument (though Paul Krugman who writes a column in several Indian newspapers questions it on the grounds that there is no evidence of increased inventory holdings), it cannot be a stand-alone explanation of the inflationary crisis. Wealth-holders will not move to commodities, which have high carrying costs, unless they already have inflationary expectations. And for such expectations to arise, there must already be a tightness in the commodity markets. Speculation can act only on top of a basic situation of shortage, which is why the speculation argument can only point to a compounding factor, not to the basic explanation for the inflationary situation.

The other three commonly prevalent explanations for the inflationary crisis attempt to invoke these basic considerations. One is by the US administration to the effect that in rapidly-growing developing economies like China and India, a variation in the dietary pattern is taking place, entailing an increased demand for commodities like meat, the production of which requires more foodgrains in the form of animal feed. This argument is so totally vacuous that one is even amazed that it is at all advanced. No doubt the richer sections of the population in both these countries are diversifying their diet and are absorbing, directly and indirectly, more foodgrains per capita. But if we take the per capita foodgrain absorption for the population as a whole, both directly and indirectly (via processed foods, animal feed etc.), then we find a very different picture.

Compared to the late eighties we find that there has been a significant decline in per capita foodgrain absorption in India. While at the end of the eighties per capita foodgrain absorption in the country had reached around 178 kilogrammes per year, this declined during the nineties, especially the latter half of that decade, and continued to do so this century, reaching close to 156 kilogrammes by 2006.

In the case of China, a number of root crops are included under foodgrains. If we confine attention to cereals alone to get a firm picture of per capita absorption, we again find that there was a steady and sharp decline in the per capita absorption of cereals for food and feed between 1996 and 2003. This decline got reversed thereafter, but the level in 2005 was still lower than in 1996. If we take the daily per capita absorption of cereals both as food and feed and measure it in terms of calories, then the figures for 1996, 2003 and 2005 are, respectively, 2428, 1918 and 2268. It follows that both in India and China there has been a tendency, taking the population as a whole, towards a decline in the per capita absorption of foodgrains in the last decade or more, taking both direct and indirect absorption into account.

In fact in the case of both these countries this phenomenon of non-increasing foodgrain absorption per capita, even when both direct and indirect absorption are taken into account, has been adduced by many as evidence that the high growth they have been experiencing has not been accompanied by any reduction in poverty. In the case of India not only is the poverty ratio higher than in China, but it is likely to have increased in the high growth period.

Since the rate of growth of population in both these economies has been slowing down over time, the decline in the per capita foodgrain absorption entails a decline in the rate of growth in the overall demand for foodgrains. In the face of such a decline, it follows that if excess demand pressures have arisen in the world foodgrains economy, then the reason must lie in an even more rapid decline in the rate of growth of the supply of foodgrains. Hence it is not from the side of Indian or Chinese demand but from the side of the world supply of foodgrains that we have to explain the current food scarcity in the world economy.

MORE PRONOUNCED HIATUS

The second basic argument that has been advanced for the inflation in food prices points to the diversion of foodgrains for the production of bio-fuels. This is no doubt a perfectly valid argument, and the Bush administration, having encouraged such diversion through the doling out of massive subsidies for it, is naturally keen to shift the blame elsewhere, which is why it is pointing, quite baselessly, to higher Chinese and Indian demand. But even this diversion for bio-fuel, important though it is, has operated on top of a situation of sluggish growth in foodgrains output. We referred earlier to the fact that the growth in foodgrain output during the two decades of the eighties and the nineties, had not kept pace with world population growth. In the period after 2000 this hiatus has become even more pronounced. During the 1980-2000 period, nearly half of the increase in foodgrain output of the world occurred in India and China, which together, however, account for only over a quarter of the actual output. In other words the world output growth was sustained by these two countries over those two decades. But in this century, in both these countries there has been a virtual stagnation in foodgrain output, and hence a decline in per capita output. (In both countries this began in the nineties itself and things have only become worse this century). It is this stagnation which provides the basic context for the shortage; the diversion to bio-fuels only worsens things.

Even a casual look at the foodgrain output figure for India bears out this fact of stagnation. The total foodgrain production in the country in 2001-2 was 212.9 million tones. For the next five years the corresponding figures were 174.8, 213.2, 198..4, 208.6, and 213 respectively. This is a picture of complete stagnation. True, for 2007-08 the government is claiming a significant increase in output, about 227 million tones, which, if correct, might mean a break in the pattern of stagnation, but this official claim is more likely to be a ploy to beat down inflationary expectations than an accurate estimate of the output. In any case, it is clear that there was a severe supply-side constraint in foodgrains in India in the current century, which came on top a declining per capita output during the entire decade of the nineties.

Very similar statements can be made about China. While during the decade of the eighties, China�s total cereal production increased by close to 40 percent, the total increase over the entire decade of the nineties was only about 7.5 percent. And in the current century, the absolute cereal output figure has been lower (until 2004, the latest year for which FAO data are available) than the annual average for the triennium 1999-01. There has therefore been a problem of shortage arising from the supply side in the world foodgrain economy because of the stagnation in these two giant economies which were responsible for much of the growth earlier.

A GROSS EXAGGERATION

The third basic argument can be said to provide an explanation for this shortage, and this lies in the fact that resources on the planet are now running short compared to �mankind�s� requirements. This argument in other words provides a nature-based as opposed to a society-based explanation for the shortage. And therein lies its limitation. While no doubt virgin land for cultivation can no longer be made available as easily as it could have been done in an earlier epoch, to say that �mankind� has in some sense reached the limits of agricultural production is a gross exaggeration. The decline in inflation in the period after the early seventies was not because of any new land coming under cultivation; it was because of income deflation. And such growth in output as occurred was owing to the adoption of land-augmenting technological progress in countries like India and China. The technological scope for such progress is far from over. The real problem is that the agency through which such progress could be introduced, namely the peasantry, is, because of this very income deflation, no longer in a position to do so. In fact, income deflation has taken its toll on the peasantry to a point where even simple reproduction of the peasant economy is no longer possible in countries like India, as is evident from the mass suicides of the peasants.

We have so far seen income deflation as a mechanism purely of demand compression. While it does compress demand immediately, it also has a long run effect on supply. As it undermines the viability of the peasantry, simple reproduction is no longer possible and supplies drop. The impossibility of simple reproduction of the peasant economy of course is the means through which the peasantry gets dispossessed of land and becomes destitute; it is precisely what capital wants and enforces.

While this fact is obvious in the case of India, the hardship of the peasantry in the case of China, though acknowledged by the leadership of that country which is taking several steps to rectify the situation, may nonetheless come as a surprise. Since China is not a capitalist economy, the key means of production in China being socially-owned, how can the operations of world capitalism affect the Chinese peasantry? The answer lies in the fact that if the peasantry, even in a socialist economy, is exposed to the capitalist world market because of the export-orientation of the economy, then it will face the same hardships as the peasantry in a capitalist economy, unless specific steps are taken by the socialist state to prevent such hardships. The difference between capitalist and socialist economies consists in the fact that the State in the latter can take such steps (though in the process it will have to come into sharper conflict with imperialism) while the State in the former is constrained in this matter, since capitalism, unlike socialism is a �spontaneous� system, subject to its own immanent tendencies which the State cannot overcome on a sustained basis.

It follows that the destitution of the peasantry over large tracts of the globe and its incapacity to carry out even simple reproduction, so that world food supplies are adversely affected, is the inevitable consequence of the march of capital. It is this march of capital that is creating a crisis for mankind. If the march of capital had brought misery to mankind in the form of world wars in an earlier epoch, it is threatening to bring misery to mankind in the form of food shortage and starvation in the current epoch. What we are seeing today is not some kind of a natural limit being reached by mankind, but the limit to which capitalism has dragged mankind. This limit can be transcended, but only when the hegemony of the social system underlying it is transcended.