People's Democracy

Is the World Capitalist Crisis Over?

Prabhat Patnaik

AN impression has got around in this country that the world capitalist crisis is over. It is no longer front page news in newspapers. One scarcely hears a word about it on television. And now that the Sensex has crossed the 15,000 mark, up from 9000 to which it had plunged a few months ago, everything appears fine to the Indian elite, which has wasted no time in spreading the cheerful news around. To be sure, the Indian elite is not alone in having this perception. An air of cautious optimism pervades even the elites in advanced countries which have been the hardest-hit by the crisis. They are more cautious, but optimistic nonetheless.

Much of this optimism springs from the behaviour of some financial indicators, notably the stock markets, whose impact on the real economy, though existent, can be tenuous. On the real economy itself, the most optimistic position is that we may be nearing the bottom of the crisis, that things are unlikely to get worse, which is very different of course from saying that things are back to �normal�. Thus British prime minister Gordon Brown has taken solace from the fact that though unemployment in Britain is rising, the increase in unemployment across periods is coming down. Much the same was being said about the United States until the month of June; but the increase in unemployment in June was much higher than in May which put paid to even these hopes. Even on current figures therefore we cannot say we are at the end of the decline.

THREE NEGATIVE

FACTORS

There are three factors moreover, each relating to the United states (whose level of economic activity matters the most for the world economy), though similar phenomena may be occurring elsewhere as well, which militate against the downturn itself coming to an end, i.e. which prevent the bottom itself being reached. The first of these is wage deflation, i.e. the decline in the real earning per worker of the employed workers themselves. Now, the initial drop in the level of aggregate demand which triggered the crisis has been getting aggravated by the decline in employment anyway; but this is further accentuated by the decline in the real earning per head of the employed workers. This tertiary drop in demand, compounding the primary drop owing to the initial jolt, and the secondary drop owing to the decline in employment, will contribute to a further prolongation of the decline in the level of economic activity and employment.

The second factor is the decline in the level of expenditures of the state governments in the US. While the federal government in the US is allowed to run fiscal deficits, state governments are not: when their revenue drops, as it does in a recession, their expenditure too drops. Now, even though the federal government in the US has run a massive fiscal deficit, most of it has gone for shoring up the banks, adding to their coffers where the money lies quietly, but not generating demand in the economy. That part of the fiscal deficit, which constitutes federal government expenditure on goods and services and which therefore adds to the level of demand in the economy, is quite small, not much more than the currently-estimated decline in the expenditure of the state governments owing to their obligation to balance budgets; but if this decline persists, and exceeds anticipations, then this federal fiscal stimulus is likely to get swamped by the decline in state government expenditures.

The third factor consists in the fact that even this level of federal fiscal stimulus is unlikely to be sustained over time. Finance capital, as is well-known, is opposed to any direct State intervention in demand management: it prefers �sound finance�, i.e. the State balancing its revenue with expenditure, or, at the most, running a small, pre-determined magnitude of fiscal deficit relative to GDP. So, even the current level of the fiscal deficit, which the Obama administration is running, is anathema for finance capital, and the large number of conservative economists and commentators who articulate its positions. The very suspicion that the bottom has been reached, if it gets spuriously confirmed by, say, the unemployment figure not registering an increase for a couple of months, will increase pressure on the federal government to cut down its fiscal deficit, which will once more push the US economy back into a decline.

This is exactly what had happened in 1937, when, after the initial phase of the New deal appeared to have ended the decline started by the Great Depression, President Roosevelt was pressurised into cutting back the federal fiscal deficit, with the result that the US economy plunged once more into a depression, from which it recovered only through the resurgence in military spending that marked the onset of the second world war. At present, so strong is the pressure for cutting back on the fiscal deficit in the US that even if the bottom of the recession is not reached, president Obama will still find it hard to sustain the tempo of deficit spending; any suspicion that the bottom has been reached will make the pressure irresistible, pushing the economy back into a decline.

A WHOLE NEW

CONJUNCTURE

All this would suggest that the crisis in the US is far from over; and if so, then the crisis in the world economy too is far from over. But there is a deeper reason why the crisis is not over, and that is because the crisis is not just a recessionary crisis, as is commonly supposed. In fact the current world capitalist crisis is such that if it does not appear in one particular form, then it will appear in a different form. Recession is just one of the forms in which it appears. If the recession abates, then the crisis will appear in a different form, namely that of a sharp inflation affecting in particular energy and food prices, which incidentally is the form in which it had appeared before the recession.

The crisis therefore must not be identified with only one particular form; it represents a whole new conjuncture. When we look at this conjuncture in its totality, then it becomes clear that overcoming it within the parameters of the capitalism we have known till now, does not appear possible. To say this is not to say that capitalism will collapse, that never happens; nor is it to suggest that the crisis will necessarily persist in one particular form, e.g. that the recession will never be overcome. The point being made is that capitalism, as it has existed hitherto, has entered into a period of permanent crisis, from which the system may still emerge through substantial restructuring (if it does not get transcended altogether), but only after a considerable time, through much groping, and the creation, through such groping, of an appropriate political balance of class forces that will carry out such restructuring. In short, as in the inter-war period, we are entering into a phase of capitalism where a major qualitative transition, as distinct from the mere playing out of its immanent tendencies, has come on the agenda. Where that transition will lead, will be decided ultimately by the outcome of political struggle; but the conjuncture that has brought such a transition on to the agenda is the crisis.

CHARACTERISTICS

OF THIS CONJUNCTURE

What are the characteristics of this conjuncture and why has it come about? In a modern capitalist economy, as is well-known, if the level of economic activity is pushed beyond a point, then this gives rise to an inflationary upsurge. This happens for a variety of mutually-reinforcing reasons: as the relative size of the reserve army drops below some threshold, the workers� bargaining strength improves, money wage claims begin to mount, and since capitalists price their products as a �mark-up� over their unit variable costs, inflation ensues. Likewise, when the level of activity increases beyond a point, raw material prices begin to climb, which again get �passed on� through higher prices, calling forth higher money wage claims (even to defend the prevailing real wages), and hence, once more, escalating inflation. This point beyond which an inflationary upsurge ensues, and which, following Joan Robinson�s terminology, one can call the �inflationary barrier�, sets a limit to the feasible level of economic activity in a modern capitalist economy. The actual level of economic activity can be less than this, but not above this, in any period, if capitalism is to remain viable. Now, the conjuncture constituting the current crisis is characterised by the fact that this �inflationary barrier� has got lowered, i.e. the level of economic activity at which an inflationary upsurge will arise has got reduced. The economy can perform below this level, as it is doing now in the capitalist world, but that constitutes recession. But as it gets out of the recession, precisely because the �inflationary barrier� has got lowered, it would soon get into an inflationary upsurge. Hence it is not the recession alone that constitutes the crisis, or inflation alone; it is the totality of the conjuncture where getting out of one form of the crisis entails getting into another form of the crisis.

This conjuncture has arisen because, on the one hand, there is an enormous concentration of finance capital, looking around for speculative gains, which can move into particular commodity markets whenever there is a whiff of possible scarcity, or of the possibility of creating a scarcity; and on the other hand, the scope for an easy augmentation of supplies has got exhausted in the case of a number of commodities. In a whole range of agricultural commodities where production is carried out by a mass of petty producers, the very fact of their impoverishment under a regime dominated by international finance capital, has made supply augmentation difficult; indeed even simple reproduction on their part has become difficult, as is evident from the vast numbers of peasant suicides in India. The withdrawal of State support, which they enjoyed under the post-independence dirigiste regime, but no longer do under neo-liberalism, has pushed large numbers of them into unviability, where they cannot cope with the needs of the capitalist world economy. In the case of other commodities, like oil, the end of the colonial arrangement has meant loss of control over this crucial resource by the capitalist metropolis. Production is now controlled to a significant extent by OPEC, which no doubt is amenable to pressure by imperialism but cannot just be dictated to by it. And imperialism�s large-scale bid for re-colonisation, entailing a reacquisition of control over this resource, though persistent and continuing, has run into rough weather. It is this conjuncture that constitutes the crisis, which must not therefore be identified only with its recessionary form.