People's Democracy

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


No. 26

June 30, 2013


The End of the Theoretical Case for Capitalism


Prabhat Patnaik



CAPITALISM represents quintessentially a world in which each “economic agent” is pursuing his or her own self-interest. Indeed it is this which, according to the votaries of the system, explains the drive to accumulate capital, to introduce technological change and to usher in “economic progress”, in the sense of effecting an unprecedented advance of the productive forces, which constitutes the differentia specifica of this system and its chief historical merit. But, how can a society in which each person exclusively pursues his or her own private self-interest without concern for others, be a viable one?


Adam Smith, the pioneering author of political economy and the person who first advanced the famous proposition that individual pursuit of self-interest leads to social good, had two implicit answers to this question. The first is that just as the pursuit of self-interest is a psychological trait of individuals, likewise “empathy” for fellow humans too is a psychological trait. In his book The Wealth of Nations he emphasized the former trait, while in an earlier book The Theory of Moral Sentiments he had emphasized the latter. If both these traits characterise a human being then there is an automatic restraint imposed by one upon the other, i.e., by “empathy” for others upon any tendency towards “aggrandizement” at their expense. (He never however argued this explicitly, which is why some have seen a conflict in the positions he adopted in his two books; but this reading, by no means implausible, makes his overall position consistent).


Smith’s second, and more implicitly categorical, answer, is that the State ensures that each individual’s pursuit of self-interest does not transgress into aggrandizement at the expense of others. Smith knew that monopoly led to aggrandizement, and argued against monopolies. His vision of capitalism was one consisting of a group of capitalists, “out of touch with one another”, each of whom responded to the market but made no attempt to manipulate the market. It was in short a vision of “free competition” capitalism.


He was aware that the capitalism that he actually saw around him did not conform to this vision; but this, according to him, was where State intervention was required: to curb monopolies and ensure competition. The laissez faire he advocated did not mean leaving the actually-existing capitalism to its own devices without any intervention by the State; rather, it meant intervention by the State to bring the actually-existing capitalism into conformity with that vision of capitalism where laissez faire could best be pursued. The implicit assumption he made was that the State could intervene in this manner, i.e., that the State could act according to the dictates of reason. His careful analysis of where the imposition of tariffs was justified, where subsidies should be given by the State etc., presupposed that the conclusions of such analysis could be effectuated through policy, i.e. that policy was free to express the conclusions derived on the basis of rational analysis.


Smith’s second implicit answer in short visualised two kinds of rationality operating in society, a private rationality that underlay the actions of individual “economic agents” and made them pursue their self-interest “rationally”; and a higher social rationality that activated the State and called forth State intervention to ensure that individuals’ actions based upon the pursuit of private rationality did not transgress into aggrandizement at the expense of others. The pursuit of private rationality within such bounds is what led to accumulation of capital, division of labour and economic “progress”, and the pursuit of social rationality is what imposed these bounds, prevented aggrandizement, and, some have even suggested, led to State intervention to ensure that the benefits of “progress” were widely shared.




The Liberal case for capitalism, first articulated by Adam Smith, rested upon this perception of two distinct rationalities in operation, because of which enormous material progress could be effected within a society that remained both viable, and imbued with a degree of humaneness.


Marx provided a diametrically opposite reading of capitalism from Adam Smith. Against Smith’s adducing of “psychological traits” underlying human action, he emphasized the coercive force of material circumstances. For instance, against Smith’s idea that commodity production arose because of people’s “propensity to truck, barter and exchange” (which were presumed to be eternal), Marx emphasized that commodity production flourished only at a certain stage of history. Against Smith’s vision of capitalism consisting of a group of small capitalists who do not aggrandize at the expense of the others and who become capitalists through a process of “original accumulation of capital” that came about because of their own parsimony, Marx advanced not only his theory of exploitation but also his concept of “primitive accumulation of capital” which entailed a forcible separation of petty producers from their means of production to produce the two basic antagonistic classes of the system. Against Smith’s vision of a capitalism where the emergence of monopolies was kept in check, Marx advanced the tendency towards centralisation of capital arising from the very fact of capitalist competition which gave rise to monopolies (and monopoly capitalism). Against Smith’s idea of the State intervening rationally to restrain private aggrandizement, Marx advanced a theory of the State being a class State, defending the interests of the dominant class(es). Against Smith’s emphasis on individual volition based on private rationality, Marx advanced the idea of the individual being forced to act in particular ways by the coercion of a “spontaneous” system. And against Smith’s vision of a capitalism frozen in time, Marx saw its “spontaneity” calling forth “combinations” of workers that grew into a revolutionary movement culminating in the overthrow of the system. But let us deliberately avoid Marx’s critique of Smith here and focus on how the system has outlived even the Liberal case for it.


This Liberal case, to recapitulate, which is the only theoretical case for capitalism, sees the system as being subject to two distinct rationalities, a private rationality of the “economic agents” and a social rationality embodied in the State. Such a case for capitalism based on dual rationalities, first put forward by Adam Smith, was reiterated by subsequent writers as well, right down to the two major Cambridge economists of the twentieth century, AC Pigou and John Maynard Keynes.


Smith had been a believer in what came to be known as “Say’s Law”, namely that there could never be a problem of inadequate aggregate demand under capitalism, whence his faith in unlimited “economic progress”. But Keynes’ entire effort was to show how the system was prone to deficiencies of aggregate demand. His justification for capitalism therefore was not in terms of the growth of productive forces that it effected (in any case he believed that productive forces had already been developed to a sufficient extent to look after the needs of mankind); it was in terms of the advantages of individualism, which he held was “the best safeguard for personal liberty” and for the “variety of life which emerges precisely from this extended field of personal choice”.


But these advantages, he argued, could be realised only if individualism could be “purged of its defects and its abuses”. And this was possible only if the “common will, embodied in the policy of the State” was directed to achieving full employment. Keynes believed that the major defect of capitalism arose from the fact of involuntary unemployment, and to remedy this it was sufficient to have “socialisation of investment”, with the State ensuring that the level of investment was adequate for full employment, rather than any social ownership of the means of production, as the socialists suggested.




The Liberal case for capitalism in short rested upon an absolute autonomy of the State from the social structure upon which it stood, which made the State an embodiment of social rationality, capable of intervening to remedy the problems that arose because of the exercise of private rationality by individual “economic agents”. Such a conception however is at palpable variance with the reality of contemporary capitalism, a variance that any honest Liberal cannot but accept. The reason for this variance is the following.


In a world where finance is international while the State remains a nation-State, the policies of the State must be oriented towards retaining the “confidence of the investors”. This is not just an implicit, structural constraint. Even the institutional practices within which the contemporary nation-State functions, which are themselves determined in accordance with the wishes of international finance capital, explicitly coerce the State into obeying its wishes in matters of policy.


For instance, not only is the central bank made autonomous of the State in the contemporary epoch, but more importantly, even when this has not been fully achieved, the magnitude of State borrowing from the central bank gets fixed (which is the case in India), unlike in the immediate post-war period when Keynesian “demand management”  and dirigiste planning were in vogue, and the State could borrow from the central bank as much as it deemed necessary.


This means that the State, even when it is not subject to fiscal responsibility legislation that fixes a ceiling on the size of the fiscal deficit relative to GDP, nonetheless is hamstrung in its borrowing, and hence in its expenditure. It is forced to go to the “market” for its borrowing needs, and to borrow from the “market”, it must remain creditworthy in the eyes of the “market”, for which it must pursue such policies as are approved of by the “market”.


The institutional practices of contemporary capitalism in short have created a situation where the State, instead of being an embodiment of social rationality, becomes itself a prisoner of private rationality, the rationality that underlies the unbridled pursuit of self-interest by international finance capital. The most bizarre indication of this new conjuncture was when the “credit rating” of the US government was scaled down some months ago. Not that the US government was pursuing some wildly progressive anti-monopoly and anti-finance capital policies; it was simply because finance capital was dissatisfied with certain minutiae of its policies. The fact that even the US government’s policies which in any case are overwhelmingly pro-corporate and pro-finance are themselves subject to micromanagement by finance capital, is indicative of the degree to which the Liberal assumption underlying the defence of capitalism, an assumption of absolute autonomy on the part of the State vis-à-vis capital, is negated in contemporary conditions.


What we have in other words is a complete negation of the case for capitalism built up by a host of authors from Adam Smith to John Maynard Keynes. No honest Liberal can possibly defend contemporary capitalism on theoretical grounds. But alas the era of hegemony of international finance capital is also characterised by an end of both honest Liberalism and honest economic theory.