People's Democracy

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


No. 18

May 18, 2008



                                Capitalism And The Contemporary Inflation III

Prabhat Patnaik

THE mechanisms through which capitalism, especially in the era of globalisation imposes income deflation and hence demand compression on the working people need to be discussed. Income deflation, it must be remembered, is not a single process but the outcome of a number of different processes which deflate not just the money wage rate but more importantly the level of employment and income especially in the non-capitalist, petty production sectors. It is income deflation in this comprehensive sense that eliminates the excess demand that would have arisen in its absence, given the fact of sluggish increases in supplies.

There are at least three processes contributing to the phenomenon of income deflation over much of the world in the era of globalisation. The first is the relative reduction in the scale of government expenditure. Globalisation consists above all in the globalisation of finance. Huge amounts of finance capital are moving around the world at a dizzying pace in the quest for speculative gains, so much so that a tax on currency transactions has been suggested in order to slow down this dizzying pace of movement. Because economies caught in this vortex of globalised finance can be easily destabilised through sudden flights of finance capital, retaining the “confidence of the investors” becomes a matter of paramount importance for every economy, for which their respective states have to show absolute respect to the caprices of globalised finance.

Finance capital in all its incarnations has always been opposed to an interventionist state, except when the interventionism is exclusively in its own favour. An essential element of this opposition has been its preference for “sound finance” ( i.e. for states always balancing their budgets, or at the most having a small pre-specified fiscal deficit as a proportion of the GDP). The argument advanced in favour of this preference has always been vacuous (and was pilloried by the well-known economist Joan Robinson as the “humbug of finance”); the preference nonetheless has always been there, and has become binding in the era of globalised finance, when states willy-nilly are forced to enact “Fiscal Responsibility” legislation that limits the size of the fiscal deficit relative to GDP. At the same time, this move towards “sound finance” is accompanied by a reduction in the tax-GDP ratio, owing to tariff reduction and to tax-sops given by states competing against one another to entice multinational capital to set up production plants in their respective countries.

The net result of both these measures is a restriction on the size of government expenditure, especially welfare expenditure, transfer payments to the poor, public investment expenditure, and development expenditure in rural areas. Since these items of expenditure put purchasing power in the hands of the people, especially in rural areas, the impact of their curtailment, exaggerated by the multiplier effects, i.e. by the curtailment of the second, third and subsequent rounds of expenditure generated by these initial expenditures, is to curtail employment and thereby impose an income deflation on the rural working population.

The second process is the destruction of domestic productive activities under the impact of global competition, from which they cannot be protected as they used to be in the dirigiste period, because of trade liberalization that is an essential component of the neo-liberal policies accompanying globalization. The extent of such destruction gets magnified to the extent that the country becomes a favourite destination for finance, and the inflow of speculative capital pushes up the exchange rate, as has happened of late in India.

But, even when there is no upward movement of the exchange rate and not even any destruction of domestic activity through the inflow of imports, the desire on the part of the getting-rich-quick elite for “metropolitan” goods and life-styles, which are necessarily less employment-intensive than the locally available traditional goods catering to traditional life-styles, results in the domestic production of the former at the expense of the latter. This causes a process of internal “de-industrialisation” which entails a net- unemployment-engendering structural change, and acts as a measure of income deflation.

The third process through which income deflation is effected is a secular shift in the terms of trade against the petty producers of primary commodities, and in particular the peasantry. A distinction needs to be drawn between an autonomous shift in the terms of trade, which is brought about, say, through pricing policy in the capitalist manufacturing sector, and an induced shift in the terms of trade that arises as a result of this autonomous shift through changes in the state of demand and supply for the primary commodity in question. An autonomous shift in the terms of trade (through, say, an increase, compared to the initial situation, in the administered price of manufactured goods, by monopoly capitalist producers) is like a tax. The imposition of such a tax may force larger primary commodity supplies from the petty producers which may affect the prices they get, and hence cause even a further adverse movement in their terms of trade.

There is also an additional mechanism. Even when there is no shift in the terms of trade against particular commodities, there is nonetheless a decline in the terms of trade obtained by the producers of those commodities because of the increasing hold of a few giant corporations in the marketing of those commodities. This too has the effect, via a shift in income distribution from the lower-rung petty producers to the higher-rung marketing MNCs, of curtailing the consumption demand of the former, and hence the level of world aggregate demand, which in turn curtails inflationary pressures on primary commodities themselves.

Globalisation in other words unleashes massive processes of income deflation which, while playing exactly the same role as profit-inflation in curbing excess demand pressures, keep commodity prices in check. And this is what we have been witnessing in the entire interregnum between the inflation of the early seventies and the recent revival of inflation.

This entire matter can be put as follows. As capital accumulates in the world economy, it requires, at the base prices, certain material elements of means of production and means of subsistence. The supply of these elements however does not grow to satisfy, at these base prices, the requirements of capital accumulation. Since any process of price increase above the base prices is against the interests of finance capital, the imbalance between the increases in demand and supply at the base prices, is overcome by compressing demand not only of the workers directly employed by this bloc of capital, through curbs on their money wages, but above all by forcibly compressing the demand existing outside the domain of this capital, so that the overall supply limitations do not adversely affect the requirements of capital. Such compression, which means the snatching of resources for the capitalist sector from the petty production sector outside of it, constitutes a process reminiscent of the “primitive accumulation of capital”.

Of course if the petty production sector, in particular peasant agriculture, could grow in tandem with the capitalist sector, i.e. if there could be a balance between the growth of the different sectors, then the need for imposing an income deflation on the working people would, to that extent, get obviated. But the very mode of interaction of the capitalist sector with its surrounding sector of petty production forecloses this possibility. The capitalist sector sells its goods there at the expense of the traditional producers, and that ipso facto compresses demand for the primary commodities and releases them for the capitalist sector. The capitalist sector jacks up its price owing to monopoly pricing; and that ipso facto releases resources for it through a compression of demand of petty producers. In other words, the squeeze on the petty production sector is not necessarily the outcome of some conspiracy; it is simply the outcome of relations between two sectors of unequal strength; and it forecloses the possibility of supply augmentation.

An example can make the point clear. The capitalist sector can meet, say, its raw cotton requirements in one of two ways: if the peasant agricultural sector increases its supply to match the requirement of the capitalist sector; or if some traditional cotton manufacturers are thrown out of their occupation and the raw cotton they were using becomes available to the capitalist sector. Since it is in the nature of capitalism to capture markets from pre-capitalist producers, its “normal” functioning will entail its meeting its raw cotton needs through the second route. And this very fact will foreclose the first route, which, in any case, it is not in the nature of capitalism to follow. Obtaining primary commodities through demand compression therefore is an intrinsic property of capitalism, which is based not on balanced but on uneven development of the different segments of the world economy.

This feature of capitalism comes into particular prominence in the contemporary epoch because of the closing of the “frontier”, so that even such supply adjustments as were possible in the period of availability of “empty spaces” (which were not actually empty since they were peopled by Ameridians and other local inhabitants) are no longer possible now. The period of “globalisation” therefore has two specific features: first it characterizes a world where supply adjustments, at least of agricultural primary commodities, have limited scope, and hence compression of demand of the working people all over the world, must come to the fore. Secondly, unlike in the colonial period when the colonial state enforced both de-industrialisation and taxation which were major instruments for compressing demand, the imposition of neo-liberal policies does this compression even in the absence of any political domination of the colonies, i.e. even in a situation of political decolonisation. We now have compression of demand without colonialism.

The view that capital accumulation required encroachments being made on the pre-capitalist sector had been advanced by Rosa Luxemburg, though the precise details of her argument, and the conclusions she had drawn from it were quite different from what has been discussed above. In particular she had seen the capitalist sector engulfing and replacing the pre-capitalist sector and, hence, the world moving towards a limit situation of exclusive presence of the capitalist sector alone, at which point further capital accumulation would become impossible. But the world does not move towards the exclusive sway of capitalism. While encroachments on the pre-capitalist sector are essential for the functioning of capitalism, and while such encroachments also compound the problems of capitalism, the manner of that compounding is different from what she had visualised. The present inflationary crisis is a manifestation of this compounding.

The tendency of capitalism as a social system is to dispossess the vast mass of the peasantry. The alternative social system that a transcendence of capitalism must bring about should be one that defends and promotes the peasantry instead of making it destitute. This does not necessarily mean a promotion of petty production and individual peasant farming. Collective and co-operative forms of operation, and even ownership, voluntarily entered into by the peasantry, can transform and modernise peasant agriculture, without dispossession and destitution of the peasantry. The alternative social system therefore does not have to be one based on petty production, but it must be one that ensures a balanced development of different sectors through a changing but non-exploitative relationship between different classes, and correspondingly changing forms of property relations and of production organisation. The core of the system has to be social ownership of the modern means of production, for that alone, by overcoming the “spontaneity” of capitalism, enables society to consciously fashion its own destiny.

The social system that the transcendence of capitalism must bring about in other words can only be socialism. Lenin, it should be remembered, had visualised the schmytchka, or the worker-peasant alliance, as forming the bedrock of socialism. At that time mankind had been faced with a choice between the barbarism of war and the alternative of socialism. Today the choice that is emerging before mankind is between mass hunger, destitution and starvation on the one side and the alternative of socialism.