People's Democracy

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


No. 26

July 01, 2012

The Acme of Irrationality


Prabhat Patnaik


THE world is facing at present not one but two crises. One, which everyone recognises and which is widely discussed, is the crisis of recession and unemployment. This began in the advanced capitalist world in 2008 with the collapse of the housing bubble in the United States, but is now spreading all across the globe, including into the relatively rapidly-growing economies of Asia that appeared originally to have escaped its impact. The other crisis is an acute food crisis, marked by an absolute decline in per capita foodgrain output and availability after the early 1980s. This decline did not manifest itself in terms of a food price inflation for a long time, because of the drastic squeeze on the purchasing power in the hands of the people across the world, under the ubiquitous neo-liberal regime. But after 2008 it has taken the form of a steep rise in food prices.




The reason that despite the continued squeeze on the purchasing power of the masses, world food prices have been rising steeply of late, while they did not do so earlier, is twofold. First, a significant diversion of grains towards bio-fuels has taken place in recent years, so that per capita foodgrain availability has fallen even more drastically compared to the falling per capita output. Second, for the same reason, world food prices have got linked to world oil prices, so that speculative pressures originating in either market express themselves as a rise in food prices.


The first crisis implies the existence of unutilised resources: of productive equipment that remains idle, together with vast amounts of labour power that are not put to use, because of inadequate demand. In such a situation, suppose the government in a particular country spends Rs 100, and let us assume for a moment that this expenditure generates demand directly and indirectly within that country itself. If the savings ratio in the economy is one-third, then this expenditure by the government will generate an additional income of Rs 300 by using up the unutilised resources of the country itself. Of these Rs 300, savings will be Rs 100 which will be exactly equal to the initial increase in spending by the government. If the government taxed away these savings worth Rs 100, then there would have been no rise in fiscal deficit, and, since savings generally accrue to the affluent (including firms), no impact on the working people’s incomes. Even the capitalists and the affluent would have been no worse off than before government intervention, since the Rs 100 they would pay as additional taxes would not have been earned by them otherwise, i.e. in the absence of government intervention. Such an operation therefore would have increased employment, capacity utilisation, output, working people’s incomes and overall consumption in society. And if the government’s own spending of Rs 100 was devoted to expanding social wage, then this would have been an added bonus for the working people.


Unused resources, in short, are a social waste; and cutting down this waste through state action can make people better off, without even squeezing capitalists relative to their situation in the absence of government action.

Why then does this not happen? Before answering this question, however, let us look briefly at the second crisis.




The decline in per capita world foodgrain output is an outcome of the agrarian crisis afflicting the peasantry worldwide. The essence of this agrarian crisis consists in the fact that peasant agriculture has ceased to be remunerative, i.e. the revenues that the peasants obtain relative to their costs of cultivation per unit area have suffered a decline, again as a result of the ubiquitous neo-liberal policies that have entailed a decline in state support for petty production. The crux of the food crisis therefore lies in the peasantry’s not having adequate resources even to carry on simple reproduction.


We thus have a bizarre denouement. While the world is afflicted by twin crises, one of these entails a waste of social resources and the other is caused by an insufficiency of resources in the hands of the peasant producers. Obviously, if the wasted resources were put to use by handing them over to the peasantry then there will be a solution of both crises without any palpable cost to anyone; but the irrationality of the social arrangement that contemporary capitalism constitutes is such that humanity continues to suffer the twin crises instead of overcoming both.


Let us look at this argument a little more closely. We have already seen, through the arithmetical example above, that in any economy suffering from recession and unemployment, if the government increases its expenditure, then there can be an increase in output, employment and consumption, which does not necessarily entail anyone being squeezed. (At the most the capitalists and the affluent can be left exactly where they were in the absence of such intervention.) Now, suppose the governments of the leading countries of the world got together to increase their expenditure by making transfers in various ways to the world’s peasantry, then there would be both an increase in world employment and output, and, over time, an increase in world foodgrain production. As such production increases, the demand for goods in the recession-hit sectors of the world economy would increase, so that there would be further increases in employment and output in such sectors. A virtuous cycle could be set up to take mankind away from the twin crises. But this is impossible under contemporary capitalism.


The first hurdle is the fact that there is no world government but a whole lot of national governments, with the leading ones, on whom the onus of enlarging expenditure would fall, belonging to imperialist countries. These governments can hardly be expected to improve the conditions of the third world peasantry, even when such improvement means larger demand for their own goods and larger employment and output in their own economies.


The second hurdle consists in the fact that even if a foolproof arrangement could be worked out to ensure that no leading country engaged in such a scheme suffered any losses to its national economy, international finance capital that is opposed to any state activism, except in its own interests, would stoutly oppose such a scheme. The fact that international finance capital, in the midst of the global recessionary crisis, wants to enforce “austerity” on governments, forcing them to curtail their expenditures, points to the enormous resistance it would mount to any scheme for an expansion of government expenditures.




This is not a new phenomenon; it is in the nature of finance to do so. During the Great Depression of the 1930s, John Maynard Keynes, who was himself a “bourgeois” economist, but was worried that a continuing crisis of capitalism would strengthen the socialist challenge to the system, had suggested that governments in the advanced capitalist countries should undertake a coordinated expansion of expenditures to get the world out of the Depression. But there was stout opposition to his proposal from finance which had kept harping on the virtues of “sound finance,” i.e. keeping government expenditures in check. As a result, the world had to wait until the “stimulus” of the Second World War to get out of the Great Depression. So, the opposition of finance to state activism in the matter of generating employment is an old and well-established fact. And it would undoubtedly prevent any effort to resolve the twin crises of today through any coordinated state intervention among leading countries.


Why, it may be asked, is finance so opposed to state intervention for overcoming crises when there is no material loss to it from such intervention? After all, if the recession was overcome through larger state expenditure, there is no obvious way that finance would lose materially from such intervention; on the contrary, if state intervention is financed through borrowing (as opposed to taxation as in the above arithmetical example), then, being an intermediary, it would witness an increase in its business and hence profits. So, why does it insist on “sound finance” on the part of the state, opposing all fiscal deficits, and also frowning on any increase in taxation?


The bourgeois liberal tradition indeed believes that finance’s opposition to larger state expenditure for overcoming recession is actually a “mistake” on its part, an outcome of a wrong theoretical understanding. Once the correct theory is explained to finance, its opposition to state intervention would disappear. Keynes himself believed something like this; he thought that once wrong ideas were overcome, mankind could live under a system of “reformed capitalism” where state intervention in demand management would obviate any need for social ownership of the means of production which the socialists argued was necessary for building a humane society.


But this is a facile understanding. The real answer to the question why finance opposes state intervention for overcoming recession lies in the fact that bringing in the state for this purpose undermines the social legitimacy of the capitalist class, especially of finance capital, which assiduously propagates the ideology that propitiating finance is what serves best the interests of society. In short, allowing state intervention for enlarging employment, even if it may bring larger business for finance immediately, undermines the entire social arrangement that is created and maintained to uphold its hegemony.




But then it may be asked: even if overcoming the twin crises is not possible at the world level, why can this not be done at the level of a particular country? For instance, since the Indian economy is sliding into a recession, why can’t government expenditure be stepped up within the economy for providing larger support to the peasantry, so that food production could expand, and we could have an end to both the food crisis and the looming recession? And since inflation is already serious, such an intervention could be accompanied by universal public distribution of essential commodities at controlled “fair” prices, so that the possibility of any accentuation of inflation because of such intervention gets ruled out.


The problem here again lies in the fact that any such intervention would be resented by finance, which would therefore leave the country in even larger magnitudes, leading to a further depreciation of the rupee and an accentuation of import-cost-push pressures on domestic prices. Such intervention therefore must be accompanied by controls over financial flows out of, and into, the economy, i.e. by a cordoning off of the economy from the vortex of cross-border financial flows. This in turn requires attacking the hegemony of finance capital, which neither the current government nor any other bourgeois government in India can have the gumption to do.


The patent irrationality of the social arrangements of contemporary capitalism is sustained by the hegemony of finance, and will continue to hold mankind in thraldom to the twin crises, as long as this hegemony is allowed to continue.