People's Democracy

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


No. 48

December 02, 2012



                                                                  The Self-Serving Logic of Neo-Liberalism


Prabhat Patnaik


AFTER the union government had announced a spate of “neo-liberal” measures like permitting foreign-controlled firms into the multi-brand retail business, raising diesel prices, and opening the insurance sector to FDI, Prime Minister Manmohan Singh announced that the air of “gloom and doom” that had hung over the economy had finally been dispelled. Within days of Manmohan Singh’s euphoric statement, the newspapers carried, on the same day, three separate bits of news: industrial production in India had remained stagnant in absolute terms for yet another month, the current deficit of the balance of payments had widened to an unprecedented degree in the latest quarter, and the rupee had fallen to a new low, after September 6, on the previous day. (This last gloomy record was to be exceeded on Friday November 23, when it fell even lower to 55.89 rupees to a US dollar).


The “gloom and doom” over the economy, far from disappearing, had actually deepened. The current account deficit should normally be expected to grow when domestic output is increasing, especially industrial output which requires significant imported inputs; but it had actually increased even in the face of industrial stagnation! And what is more, notwithstanding all the genuflections that the government had made before international finance capital, by adopting for instance measures like permitting foreign-controlled firms in multi-brand retail, the rupee had still tumbled to a new low! This means that even after the genuflections were made, the inflows of finance were still insufficient to meet the current account deficit, which only shows the extent to which economic policy in India is based on complete fantasy.




But then neo-liberalism itself is a fantasy. It has cruel effects on the people no doubt, but it is a fantasy nonetheless. To say that the market in a capitalist economy left to itself functions in a manner conducive to society’s interests is a fantastic statement, totally devoid of any reality. The problem with fantasies however is that when the real world is moulded in accordance with the fantasy but fails to produce the results expected by the fantasy, the argument invariably advanced is that it was not sufficiently moulded and needs to be further moulded, never that the fantasy itself was unreal.


The fantasy therefore can never be dispelled by rational argumentation. Just as the statement “you can be cured of your cancer if you earnestly ask the goddess to rid you of it” can never be disproved for a believer, since the continuation of cancer will be invariably explained by him by the fact that the prayer to the goddess was not earnest enough, likewise the fact that neo-liberal measures do not work as promised will invariably be attributed by the believers to their not having been tried hard enough.


Such fantasy is invariably dangerous. It moulds the world, at great cost to the people, into its own ideal, but never achieves what it sets out to do. The Great Depression of the thirties provides a classic example of this. Bourgeois theory held that if markets were allowed to work without hindrance and, all prices, including money wages, were flexible, then all markets, including the labour market, would clear, ie, unemployment would disappear; in the midst of the Great Depression therefore an attempt was made to solve the unemployment problem, which according to this theory was a result of markets not being allowed to work freely and the wages being set at too high a level because of this hindrance to free market functioning, by cutting wages. When this did not work, because the basic theory underlying it was “fantastic”, the argument of the believers was that wages had not been cut sufficiently!




This logic is not only flawed and immune to rational argumentation, but it is self-serving as well. If neo-liberal measures do not work in achieving what they profess to do, then the fault lies not in those measures themselves but in their not being tried hard enough. Ergo, adopt more neo-liberal measures: if neo-liberalism does not work, then try even more neo-liberalism. This dangerous self-serving logic has worked itself out to deadly effect in numerous countries under the tutelage of the IMF and the World Bank, from Latin America to the countries of the erstwhile Soviet Union. As neo-liberal measures brought ruin to these countries, this very fact was used to push through even more neo-liberal measures.  A vicious dialectic of neo-liberalism was thus set up where every failure of neo-liberalism, correctly anticipated with much pain and anguish by its critics who were aware of the “fantastic” nature of the claims being made on its behalf, was used for its further adoption. As economic crisis intensified, precisely as a consequence of the adoption of neo-liberalism, such intensification was used as an argument for furthering the pursuit of neo-liberalism, and hence for a further intensification of crisis.


Several of these countries have finally thrown off this legacy through the intervention of the people: Latin American countries, today on the cusp of a popular upsurge against the traumatic effects of neo-liberal measures imposed upon them by the Bretton Woods institutions, cannot but rue nonetheless the “lost decade” when they were caught up in this dialectic. India, which until now, had been riding a wave because of the bubble-sustained world capitalist boom, is now getting caught in this dialectic with the onset of the world crisis that erupted in 2008. And in a country like ours where vast numbers of people are either experiencing destitution or are on the verge of it, where the margin for “error”, while adopting economic measures, is extremely limited, where even the luxury of a “lost decade” cannot be afforded, since long before the decade gets over human misery on a massive scale would have broken out, this dialectic must be nipped in the bud, through an awareness of the way it would unfold.


The fact that India’s current account deficit has expanded has to do with the world crisis. It has nothing to do with any insufficiency of neo-liberalism practiced within the country. The world crisis has hit Indian exports and is likely to do so to an even greater extent in the coming days, because protectionism in an overt or covert form is likely to characterise the policies of the advanced economies, notably the US under the new Obama administration. At the same time, a hallmark of any crisis is the collapse of euphoria, of the kind that had made finance capital “bold” enough to look for opportunities of speculative gain in every nook and cranny in the world; in the coming days the flow of finance to countries like India would dry up compared to the situation that existed during the world boom. Already we can see that every “bad news” for capital coming from Europe makes international finance scurry to the Unites States, and withdraw even from countries like India. Under these circumstances, a perennial problem of bridging the current account of the balance of payments, and a downward pressure on the rupee, is bound to plague India.


Using the foreign exchange reserves to overcome the problem will not work, since the depletion of reserves will only make finance even more wary of coming into India or  staying on in India, and may precipitate capital flight that will only compound the problem. Under the neo-liberal dispensation therefore the country is caught in a hopeless situation, at least as long as the world capitalist crisis lasts, which is going to be a pretty long time (for there is no end to it in sight).


Within the neo-liberal dispensation India cannot do without attracting financial inflows to bridge the current account deficit, but at the same time it would not succeed in attracting the requisite financial inflows for bridging the deficit. Its inability to attract adequate financial inflows would cause the rupee to tumble, but this very fact of the tumbling rupee would cause the financial inflow to be inadequate. (Which speculator would like to hold a currency, or an asset denominated in a currency, that is tumbling?) The tumbling rupee would raise the cost of imported inputs, especially oil, and worsen domestic inflation. Already there are reports (The Hindustan Times, November 27) that petrol prices are likely to shoot up because of the fall of the rupee. But every such acceleration of inflation would create expectations that the nominal exchange rate would fall by at least as much as the rate of inflation (to keep the real effective exchange rate, which is what determines the competitiveness of a country’s exports and imports in the world market, unchanged); and this would  further deter the inflow of finance. To cope with this hopeless situation, the government would announce even greater concessions to foreign capital; and as this does not overcome the situation, as indeed it hasn’t despite the September measures, it would reason, as other before it had reasoned, that these concessions were insufficient and that even greater concessions were needed to overcome the country’s problems.


In short, even though the “gloom and doom” hanging over the economy are a result of the crisis of the capitalist world, whose impact has been imported into the economy under the neo-liberal regime (though for a while admittedly it appeared as if India had managed to tide over the crisis by not having carried neo-liberalism far enough), the effort to dispel it would take the form of inducting even more neo-liberal measures in a steady escalation. The country is going to be trapped in the vicious dialectic of neo-liberalism as many others before it, in Africa, Latin America and the former Soviet Union had been.


This dialectic is not a mere conspiracy on the part of a handful of persons in authority; it is embedded in the structure of the neo-liberal dispensation itself. It cannot be overcome merely by replacing one set of policy-makers by another; as long as the neo-liberal dispensation lasts in our country and crisis continues to afflict the capitalist world, no matter who the policy-makers are, the same vicious dialectic would get enacted.


The only way for the country to get out of this dialectic, since it can do precious little to counter the world capitalist crisis, is to get out of the neo-liberal dispensation itself, to re-impose, judiciously, controls over capital flows and trade flows (even Obama is trying to do the latter). The same Obama, of course, would fulminate on behalf of the United States if such controls are imposed by India; but US arm-twisting can be resisted only if the Indian people are taken into confidence and mobilised against it. This is a policy direction which can be followed only by a State with a different class orientation compared to the current one.