People's Democracy

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


No. 09

February 26, 2012


Capitalism in an Impasse

Prabhat Patnaik


WHAT is happening in Greece today is symptomatic of a much deeper malaise of contemporary world capitalism. To understand this malaise we have to go back to certain basic features of capitalism as an economic system.


The bulk of wealth under capitalism is held not directly in the form of physical assets, but indirectly in the form of claims over physical assets, i.e. in the form of money and financial assets; and these indirect claims too have multiple “layers”, i.e. a wealth-holder holds a claim on a claim on a claim on a claim over a physical asset, like a factory or a building. All these claims have values in terms of “money”. The values of these claims, vis-a-vis the world of commodities, which is ultimately what matters, may change, either because their values vis-a-vis money change, with the value of money itself vis-a-vis commodities remaining unchanged, which is what happens through “bubbles” and their collapse; or they may change because the value of money itself changes vis-a-vis the world of commodities. Since “bubbles” (and their collapse) typically affect particular types of claims, which is why we talk, say, of the “dotcom” bubble or the “housing bubble”, it is the latter kind of collapse, namely in the value of money vis-à-vis commodities, which affects the commodity value of all claims, that is far more serious for the capitalist system. How are such collapses prevented, i.e. how is the value of money vis-a-vis commodities maintained?


It is a mistake to think that within any country, the value of money vis-à-vis commodities is maintained through government diktat, i.e. that intrinsically almost worthless bits of paper carry value vis-à-vis commodities because they have the imprimatur of government prescription (including the fact that the government collects taxes in these bits of paper). To see this we just have to visualise a situation of hyper-inflation which entails a collapse in the commodity value of money. In such a situation, no government diktat will make people hold money or money-denominated (financial) assets. There must therefore be something else that prevents such situations from arising, and that must be intrinsic to the functioning of the system itself. That something consists in the fact that money  wages are typically kept fixed in any period, and made to change only slowly, if at all, over time. The value of money within any economy is in reality maintained by this fact, namely that the value of one crucial commodity, viz. labour power, is fixed in terms of it.




This, in turn, becomes possible through the maintenance of a reserve army of labour whose role is to weaken the trade unions so that they cannot enforce money wage increases even when prices are rising. Full employment under capitalism is impossible for several reasons and this is an important one among them, namely that full employment under capitalism is incompatible with the role of money as a store of value.


But money wages, i.e. the value of labour-power, being sticky within each country is not enough. If the use of the labour-power of a particular country produces goods, which at the money wage prevailing there (in terms of say dollars at the going exchange rate), can be sold only at a dollar price where nobody wants those goods, then holders of financial claims over assets in that country will feel “disturbed”: the value of their claims vis-a-vis the goods produced in that country may remain stable, but the goods of that country itself will not be worth much in the international market, if they are unsaleable. Goods that are unsaleable, i.e. cannot be converted into money, cannot possibly be representative of the universal equivalent, that is money. Not only must money wages of each country therefore be sticky, but they must also be sticky at levels where the country becomes (to use momentarily the terminology and analysis of “mainstream economics”) “internationally competitive” at the prevailing exchange rate.


This need not, of course, be the case if the holders of financial claims in that particular country are constrained to keep holding those claims (the only other alternative for them being to hold commodities); but if they can shift from holding claims in that country to holding claims in some other country, i.e. if there is globalisation of finance so that finance can move around freely across countries, then money wages in any country must not only be sticky, they must also have a particular level, corresponding to the exchange rate, at which the country is “internationally competitive”.


A moment’s reflection however would show that “international competitiveness” per se means little; a country may be “internationally competitive” by any objective criterion and yet its goods may not sell internationally for a variety of reasons, ranging from prejudice against such goods to lack of familiarity with them. Hence the only index that wealth-holders will look at, for continuing to hold financial claims in a particular country, is whether it runs a persistent balance of payments deficit. If it does, then even if its money wages are sticky they would move elsewhere; but, if it does not, then they would stay on.


But whether a country faces a balance of payments deficit depends not just on its own actions. It depends very crucially upon the state of world demand. A fall in aggregate world demand must mean a fall in the world demand for the products of some countries. This may have nothing to do with their “international competitiveness”, and yet they would face a balance of payments problem. For instance let us suppose that the American government cuts its expenditure which reduces “world demand”, and that some officials in the US lose their jobs and incomes as a result; if their incomes were spent each year on a holiday in Greece marked by a visit to the Acropolis, then their income loss would entail a worsening of the Greek balance of payments, which has nothing to do with any loss of “international competitiveness” on the part of Greece. The proposition that “competitiveness” alone determines the state of the balance of payments belongs to “mainstream” economic theory that assumes, entirely erroneously, that there is never any problem of aggregate demand (and that Say’s Law, Which Marx had pilloried, holds).


To make wealth holders continue to hold claims, say, in Greece, i.e. to prevent a financial outflow, the Greek government, then, will have to take steps to reduce aggregate demand within the Greek economy (which is what financiers are demanding today), so that Greek imports go down and the Greek balance of payments improves. But this not only imposes even greater burdens on the Greek people who were already hit by reduced world demand for their products, burdens in the form of even greater unemployment and reduced consumption, but also compounds the initial decline in world demand, aggravating the world economic crisis.




There are, of course, two other alternatives available to Greece in this example: one is a deflation in money wages within Greece without a change in exchange rate, which would lower Greek prices compared to those of other countries and may improve the Greek balance of payments. But since the price fall within Greece would in such a case be less than the fall in money wages, the effect in terms of immiserising the working population would be much the same as discussed earlier.


The other alternative is to carry out an exchange rate depreciation (which, of course, in the concrete case of Greece is not possible since Greece is part of the Eurozone without any currency of its own). Any exchange rate depreciation, however, to be effective, must entail a reduction in wage share (since there are always some imported inputs whose domestic currency costs go up with the rise in foreign exchange price, and with capitalists enforcing fixed profit margins, net exports can improve only if wages do not increase at the same rate as the price of foreign exchange). In addition, in the context of any significant decline in the world aggregate demand, it is not one but many countries that would be in a plight similar to Greece. Exchange rate depreciation therefore will necessarily invite retaliation from other similarly-placed countries; and what is more, even countries that have balance of payments surpluses despite the decline in world demand would still be facing some unemployment and recession, and they too would join in the game of retaliation rather than lose their markets. In short, an exchange rate depreciation which amounts to a “beggar-my-neighbour” policy will invariably invite significant retaliation if undertaken in the midst of a world recession.


It follows therefore that in a world where capital, especially finance, is free to move around globally, any initial decline in world demand gets magnified through the imposition of what are called “austerity” measures, i.e. measures to cut back domestic absorption. This is what we are actually seeing in the context of Greece where severe austerity measures are being imposed. There are, however, two points about this imposition of austerity that need to be noted. First, it is often thought to be merely a “stupid” policy which is imposed only because of “bad economics”. But that is not the case: it is dictated as we have seen, by the interests of finance capital. To be sure, any “austerity” and worsening of the condition of the working population jeopardises the viability of the system and hence cannot be in the “long term interests” of any capital, but since capitalism is not a planned but a spontaneous system such “long-term interests” do not usually figure in the calculations of capital (otherwise there would never have been world wars).


The second point is a technical one. It is often argued that if Greece had a central bank of its own from which its government could borrow (by printing money), then the whole problem of its government getting indebted to foreign banks and having to impose “austerity” would not have arisen. But this too is not true. The problem of that country’s debt (and of many other countries) arises because of a balance of payments problem caused by the world recession. Even if the government borrowed from the central bank and not from foreign banks, the country would have had to borrow from abroad to meet its balance of payments deficit, caused by the fact that its level of domestic activity was held up inter alia by government expenditure not being slashed even in the face of declining exports. Exactly the same problem of debt therefore would have faced the country, even if the government financed its deficit by printing money.


(to be continued)