People's Democracy

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


No. 10

March 04, 2012


Capitalism in an Impasse – II


Prabhat Patnaik


TO see this clearly let us assume for simplicity that the private (including the household) sector’s budget is always balanced. Then the fiscal deficit is always equal to the current account deficit on the balance of payments. Let the fiscal deficit be 100 and let it be financed by the central bank’s printing money which it hands over to the government against government bonds. To meet the current account deficit, however, the central bank has to borrow 100 from abroad, i.e. it has to obtain 100 in foreign exchange against 100 of its own IOUs. And the 100 of newly printed money given to the government must come back to the central bank to be exchanged against 100 of foreign exchange, which means that the government, though apparently borrowing from the central bank, is indirectly borrowing from abroad, mediated through the central bank.




The conclusion that follows is, to repeat: in a world with globalised finance, any decline in aggregate world demand brings enormous hardships to the working population, not just because of its direct effects but, additionally because of its “multiplier effects” via “austerity”. The question that naturally arises is: how has capitalism managed to avoid such a denouement throughout its history, except to an extent during the Great Depression of the 1930s. The simple answer to that is: through its colonial empire. The colonies of possession like India (and semi-colonies like China) directly absorbed the goods, notably textiles, of the leading capitalist power of the time, Britain, which were unsaleable elsewhere. And in return they gave a larger amount of their own goods, not just of an equivalent value, gratis to the leading capitalist power(s) for investment in the “new world” to which an enormous wave of migration was taking place that expropriated land from the local inhabitants there, and reduced domestic unemployment in the metropolis.


The colonial system, taking both colonies of possession and colonies of settlement, ensured two things, both crucial for financial stability of the capitalist world in a regime of free financial flows, as was the case under the Gold Standard. The first was the absence of any serious deficiency of aggregate demand for metropolitan goods. (The price fall that occurred in late nineteenth century, to which the term “Great Depression”  used to be, and still is often, attached, may be cited as a counterexample to this, but the price-fall was essentially in primary commodities and got passed on to manufactures. It actually raised the value of money and contributed to financial stability under capitalism rather than instability). The second contribution of the colonial system was that it simultaneously prevented any inflationary pressures. A high level of aggregate demand runs the risk of generating inflation, but the colonial taxation system which appropriated primary commodities gratis ensured that excess demand pressures in the metropolis were kept at bay. The colonial system therefore was admirably suited to ensure the financial stability of a capitalist world open to free capital flows.


The exhaustion of the scope for the colonial system to play this role (rather than the fact of political decolonisation per se in a juridical sense), which is a result both of the fact that the third world markets now are too small relative to first world capacities and needs, and also of the fact that the share of third world primary commodities, with the exception of oil, in the gross value of metropolitan output has shrunk to remarkably low levels (thanks inter alia to a long history of adverse terms of trade movements against such commodities), entails an end of this phase. This source of financial stability can no longer be relied upon.


Keynesianism, of course, opened up another possibility, namely State intervention in economies across which capital movement was controlled, for stabilising the system. World aggregate demand was kept up, because, whether through military Keynsianism (as in pre-war Japan and Germany or post-war US), or through welfare Keynesianism (such as what European social democracy effected), the State intervened in every metropolitan economy to keep up the level of demand. True, the system lacked any bulwark against inflation, a fact already anticipated by prescient radical Keynesian economists like Joan Robinson, but competition among themselves to export of primary commodities by newly-industrialising third world countries, each trying to earn as much foreign exchange as possible for importing machinery and “maintenance imports”, kept inflation at bay for a long time in the post-war period. It did finally emerge in the late sixties and early seventies, but meanwhile gigantic accumulations of finance, owing inter alia to persistent US fiscal deficits that increased greatly during the Vietnam War, had pushed the world beyond the Bretton Woods system and into a regime once more of globalised finance.


This regime of globalised finance today, however, does not have the prop of the colonial system, which is the root-cause of its travails. Because it is a regime of globalised finance, Keynesian demand management becomes difficult, not just for other nation-States that are constrained to follow “sound finance” to “retain the confidence” of internationally mobile finance capital, but even for the leading nation-State, the US, in whose case enlarging the fiscal deficit “leaks out” as larger current account deficit on the balance of payments and hence increases net indebtedness of the US, ironically for financing employment elsewhere. This, together with the fact that colonial markets are of little significance, means that the system has to rely on “bubbles” for its booms; the collapse of such “bubbles” brings recessions, which for reasons already discussed get magnified via what may be called the “austerity multiplier”.




The proposition that the exhaustion of colonial (pre-capitalist) markets constitutes a sort of climacteric for capitalism was advanced by Rosa Luxemburg. She, of course, had visualised this “exhaustion” in terms of a complete assimilation of the pre-capitalist segment into the capitalist one, i.e. as a state of universal extension of the metropolis; and she had argued that such “exhaustion” would mean a “break-down” of the system where further accumulation became impossible. In both these respects she was wrong: the metropolis never gets universalised and the pre-capitalist economy never actually disappears, no matter how much it is squeesed; and systems do not just break down. But in postulating a climacteric for capitalism associated with the “exhaustion” of the scope for colonial and semi-colonial exploitation, she had shown great prescience.


The sense in which this “exhaustion” occurs has already been discussed above. And the climacteric consists not in any “break-down” but in the fact that the system tends to turn with much greater savagery upon the working people within the metropolis itself (to which the diffusion of capitalism to erstwhile colonies and semi-colonies further contributes). The social stability of capitalism gets greatly undermined, its presentation of itself as a humane system suffers a blow, as is happening in Greece today. True, a new “bubble” may arise that may temporarily refurbish its image, but its inevitable collapse will once again make it turn with enhanced viciousness upon its own working population, not just the working population of the “outlying regions” which has always been its target.


If capitalism could create a “world state”, in consonance with the globalisation of capital, where individual economies’ having balance of payments surpluses or deficits did not matter because the “world state” would effect suitable transfers across them, then the particular problem highlighted here would disappear. The problem of inflation, arising from shortages of primary commodities like food and fuel would still remain, because the capitalist “world state” would continue to squeeze petty primary producers; but the “austerity multiplier” need not operate (which is exactly what those arguing that the EU should take over Greek debt are advocating at a “sub-global” level). And indeed Keynesian demand management by this “world state” would keep deficiency of world demand at bay. But a system that oppresses petty producers both within and across nations, and sustains it through a whole ideology of racism and cultural superiority is intrinsically incapable of such internationalism. Internationalism in short cannot come piecemeal, through a “world state” that simultaneously oppresses petty producers, as capitalism spontaneously does: true internationalism is fundamentally incompatible with capitalism.


To say all this is not to suggest the imminence of an overthrow of the system, let alone a “beak down” which, of course, never occurs, since the class-preparedness for the former still remains a far cry. Besides, globalisation itself puts barriers against such class mobilisation through a process of “casualisation”, de-concentration, and fragmentation of workers (even as capital keeps getting concentrated in ever larger blocs), not to mention hurdle imposed by the high rates of unemployment that weaken the striking power of the working class. But the irrationality and viciousness of the system is getting increasingly exposed and its legitimacy is getting undermined in the eyes of large masses of the people.