People's Democracy

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


No. 23

June 15 , 2008


Is The Present Crisis Ricardian?

Prabhat Patnaik

DAVID Ricardo, the outstanding predecessor of Marx, had visualised the process of capital accumulation getting constrained by the non-availability of adequate supplies of land. As accumulation proceeded and the demand for wage goods, primarily foodgrains, increased, cultivation would have to be carried out on less and less fertile land where yields got progressively lower. Given the fact that a subsistence wage in terms of foodgrains had to be paid, the lower yields meant a declining rate of profit in agriculture. And since the difficulty of obtaining a unit of output from agriculture increased relative to industry, the price of foodgrains would rise relative to industrial goods, which, given that a subsistence wage in terms of foodgrains had to be paid in industry too, would push down the rate of profit in industry as well. Thus according to Ricardo the rate of profit would decline over time and would eventually fall to zero, bringing accumulation to a stop. He called this state of affairs the “stationary state”.

Though land was what he focused on, Ricardo's argument can be extended to any exhaustible natural resource. This exhaustibility would make the relative price of these resources rise, bringing the process of capital accumulation eventually to a halt.

Many would see in the current capitalist crisis a Ricardian denouement. They would see the skyrocketing food and oil prices, which are a central feature of the current crisis, as the necessary fall-out of the process of accumulation hitting against natural constraints. Indeed, Professor Paul Krugman of M I T who writes a regular column in the New York Times that is reproduced in several Indian newspapers, has been arguing this for some time. The relative prices of food and fuel according to Krugman will never again go back to what they were prior to the current inflationary upsurge, and this is because easily available land and easily tappable oil sources no longer exist.

Marx, though a great admirer of Ricardo, differed from him on his reasons for the falling rate of profit. The precise details of these differences need not detain us here. But central to these differences was one of perspective. The Ricardian theory focused on a particular sector with a particular set of specificities as underlying the falling rate of profit, while Marx's own theory of the falling rate of profit emphasised social relations, the relations within and between classes, as underlying this phenomenon. Ricardo's theory in short was a nature-based as opposed to a society-based explanation of crisis. It was use-value-centred, and not social-relations-centred, as Marx's was. The question naturally arises: has Ricardo been vindicated over Marx after all, by the current world capitalist crisis? Is the current crisis a Ricardian one after all, or is there something essentially societal underlying it?



The fact that the current high in foodgrain prices is not the result of some natural limit being reached for foodgrain production, but is the outcome of a drastic squeeze on the peasantry which has made even simple reproduction in the peasant economy impossible, has already been argued in articles published in People's Democracy earlier. The stagnation in foodgrain output at the world level which has characterised the present century has been the consequence of a drastic income deflation on the peasantry, which is a characteristic feature of capitalism. This feature was temporarily kept in abeyance in the years immediately following decolonisation but has resurfaced with a vengeance with the phenomenon of globalisation. In Kerala, to take a familiar example, the loss of profitability in agriculture during the years of globalisation (which is the consequence of income deflation arising from the neo-liberal policies being pursued) has greatly increased the amount of land being kept fallow. The same story is repeated elsewhere. It is not the shortage of land but the fact that cultivation no longer pays which is responsible for the output stagnation that is now causing the price rise in foodgrains.

In such a case, the latter-day Ricardians would argue, this price rise is really quite innocuous. It will, by restoring agricultural profitability, increase output, and thereby negate itself. In short, they would say, if the current crisis is not a Ricardian one, then it is not much of a crisis at all. Rather, it is a mere transient phenomenon, a mechanism for re-establishing equilibrium, a minor episode in the zig-zag course through which balance is maintained between different sectors in capitalist economies.

But this is an erroneous perception. The rise in price does not merely restore sectoral balance within a given unchanged set of social relations; it profoundly alters the social relations themselves. The increase in agricultural profitability will not so much increase peasant production as stimulate a displacement of the peasantry by corporate capital entering agriculture. This, if it succeeds, will be a further act of expropriation (or income deflation) of the peasantry which will reduce demand, and thereby negate inflation at the expense of the peasantry, without necessarily causing much increase in output. But it will succeed, if at all, only through an intense unleashing of class conflict. In short, looking at the current situation either in terms of the reaching of a natural limit, or as a mere episode in a cyclical process through which peasant agriculture and capitalist industry co-exist and grow side-by-side is misleading. What we are seeing is the unfolding of a drama embedded in social relations.



But while the story underlying the food crisis need not be re-told here, the question arises: what about the rise in the world price of oil? That surely has nothing societal about it, and owes its origin entirely to the fact that no new oil-strikes have been made recently while the cost of extraction at the margin has been going up. The answer to this question is almost exactly the answer that Marx had given to the Ricardian proposition about going from more fertile to less fertile land. This, Marx had argued, never happened. As the margin of cultivation expanded, some times more fertile land came under cultivation, sometimes less; land that was considered more fertile for the cultivation of some crops was less fertile for others. Hence there is no monotonic increase in the marginal cost of production in agriculture evaluated in real terms.

Analogously, there is no necessary monotonic increase in real extraction costs at the margin in the case of oil. A period of increase in extraction costs may be followed by one of decline if new oil strikes are made, as they well may be. At this very  moment for instance there is a belief that Canada is perched on enormous oil reserves. There is therefore no presumption in favour of a Ricardian denouement here.

But there is a further fact. Almost everyone is agreed that the massive increase in oil prices at present is caused to a great extent by speculation. Paul Krugman questions the significance of speculation on the grounds that there is no noticeable increase in inventories, as should happen if the actual price became higher than what non-speculative demand and supply would dictate. But the demand for oil is not particularly sensitive to price in the short-run, so that the same demand-supply balance can be reached at a whole range of alternative prices, i.e. there can be significant upsurges in prices without any noticeable inventories being held. Which of these alternative prices actually prevails depends upon the strength of the speculative forces, as expressed in the price in the futures market, i.e. upon expectations about the future. Hence the reason why the current oil prices have shot up is because expected oil prices have shot up.

Now, expected prices may shoot up because of expected shortages. They may also shoot up as a consequence of increases in the current prices, i.e. because of current shortages. In the latter case, where a causation opposite to what was mentioned above is also working, i.e. from current to expected prices, a veritable price spiral may result, with increases in current and expected prices feeding on one another and causing this price upsurge. But there is no reason to believe that the present increase has anything to do with such a spiral. The general view is that in the absence of speculation the world oil prices should be ruling at around $50-60 per barrel. If instead they are ruling at $140 per barrel, then this is because there is a solid tangible factor, having to do with structural changes occurring within capitalism, which is directly influencing the expected prices of oil, and this is the weakening of the dollar, which is a societal fact a la Marx and not a natural one a la Ricardo.     



The world capitalist economy requires a stable medium for holding its wealth, stable in the sense that the value of this medium in terms of commodities should not be expected to go down. Traditionally, one commodity, namely gold, was chosen to perform this role, but over time the currency of one of the countries which is supposed to be “as good as gold” has increasingly played this role. Its main characteristic consists in the fact that its value in terms of the world of commodities is not expected to fall to any significant extent. This was ensured earlier, e.g. under the Gold Standard or the Bretton Woods system, by tying its value to that of gold. But after Nixon snapped the gold link of the dollar in 1971, we live in a world in which there is no such explicit backing, in terms of gold or any other commodity, for the currency in terms of which the bulk of the world's wealth is held. There is however an implicit backing, and that backing is provided by the stability of its value vis a vis the one commodity which is central to a modern capitalist economy, viz. oil.

The strength of the dollar, its acceptability as “world money”, hinged upon the fact that its value in terms of the most important commodity, viz. oil, was expected to remain unchanged. This explains inter alia the US desperation to control the world's oil reserves, first by attacking Iraq and then attempting to browbeat Iran.

Ironically however the very fact that this effort has backfired has led to a rise in oil prices in terms of dollar to start with, and hence to a loss of confidence in the dollar, though of course the recurring US current account deficits have played their role in this process. This accounts for the shift from dollar to oil in futures trading and hence the rise in the future price of oil which in turn reacts back upon is current price.

Put simply, more and more wealth-holders are shifting from dollar-denominated assets to claims on oil as the means of holding wealth. And this accounts for the phenomenal rise in the price of oil. How this crisis is going to develop, whether it will lead to a change in the role of the dollar, or whether the dollar will continue to remain as world money, and if so under what circumstances, remains to be seen. But the fact is that we are witnessing a development which has little to do with any natural limits imposed upon capitalism as Ricardo had visualised.