People's Democracy

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


No. 31

August 04 , 2013


The Long-Term Crisis of Capitalism


Prabhat Patnaik  


CAPITALISM is a bizarre system. When the “going is good”, when the economy is expanding, capitalists expect this expansion to continue and make growing investments, which actually make this expansion continue. In fact they develop euphoric expectations which make them even more reckless in undertaking projects, and the boom keeps getting more and more pronounced. But once this euphoria is deflated for some reason, the bubble bursts, investment is cut back, profits fall, which leads to a further cut-back in investment, and the economy enters a downturn. In the downturn, unemployment increases, wages are cut, which further cuts down demand, which makes the downturn even more acute. When and how the economy comes out of the downturn, when and how capitalists’ spirits start reviving is not clear. But when it does, a new boom gets started and gathers momentum.


This has been the story of capitalism since its birth. But, apart from the question of how exactly the downturn comes to an end, through a revival of capitalists’ spirits, there is a second crucial question that this account leaves unanswered, namely, through these booms and slumps, why does the economy experience any net expansion at all? Why does it grow through these periodic booms and slumps? The fact that it has done so is not in doubt, but the question is what mechanism is there to explain why it has done so? Bourgeois economics is hard put to find any internal mechanism within the system that can explain such growth. Indeed it avoids the problem altogether by merely assuming Say’s Law, that there is never a problem of aggregate demand in a capitalist economy because “supply creates its own demand”. In such a case however there should be no recessions or slumps ever, and capitalism should be crisis-free, which is patently absurd.




When we look at the actual history of capitalism, it becomes clear that the cause of growth within the system has been the availability of certain external props for capitalism. Throughout the nineteenth century, right until the First World War, the external prop that was available to the system and made it function relatively satisfactorily, causing what is often referred to as a “long boom” between the mid-nineteenth century and the First World War, was the “colonial system”.


This worked as follows: a vast migration of European population took place to the “new world” where land was grabbed from the local inhabitants, so that the migrants could set themselves up as “farmers”. Alongside such migration of people there was also a migration of capital from Europe, which was extracted from the colonies of possession, such as India and Indonesia.  European goods could be sold in these colonies of possession at the expense of local craftsmen, and colonial goods of an even greater value could be taken away as unrequited exports, ie, could just be snatched away, for sale in the “new world” of European settlement, for which Europe, and not the colonies of possession, got credit. Say, if Rs 100 of European goods were sold in the colonial markets, Europe took away from these colonies not just Rs 100 in return but Rs 150 (the extra Rs 50 constituting “drain” that was simply snatched away without any quid pro quo for the colonies). And these Rs 150 were shown as European exports to the “new world”.


This killed three birds with one stone for the capitalist core in Europe. First, Europe remained relatively crisis-free (which explains the “long boom”): whatever downturns occurred could be quickly overcome through sales to the colonies since the latter provided, as it were, markets “on tap”. Second, there was an enormous diffusion of capitalism from Europe to the “new world” consisting of the United States, Canada, Australia, New Zealand and other temperate regions of white settlement. And third, the cost of this diffusion was borne not by Europe itself, which, had it happened, would have entailed lower European living standards, but by the colonies.


By the same token, however, the colonies suffered twice over. First, taking the above example, Rs 100 of their goods (mainly raw materials and primary commodities) were taken away from them in exchange for goods which only substituted those already being produced domestically and whose import thus caused deindustrialisation and domestic unemployment. The immediate victims of this first suffering were the artisans and the craftsmen displaced through deindustrialisation (and they in turn raised land rents by trying to lease in land and lowered wages by swelling the labour supply). The impact of the second suffering was directly on the peasantry (who were the main primary producers), since Rs 50 of produce constituting the “drain” was simply snatched from them in the form of taxes.


This arrangement worked well for the metropolis until the First World War. It solved both the problems of capitalism mentioned earlier. It provided the system with an external prop of the sort required to ensure that it experiences net expansion, ie, growth. At the same time, it also meant that downturns when they occurred could be quickly overcome. In fact the system experienced growth precisely because the periodic downturns were brief and shallow while the periodic booms were pronounced and prolonged. This latter phenomenon was the mechanism for growth.


The breakdown of this arrangement was a major factor underlying the Great Depression of the 1930s, both its depth and its protracted nature. In the post-second world war period when the old arrangement had ended for good, both because the “frontier” had been reached in the “new world”, and no more European migration on the scale that had occurred earlier was possible, and also because the colonies of possession were in the process of acquiring independence, a new arrangement was put in place, and this was State intervention in “demand management”. This was not as good an arrangement as the “colonial system” for solving the problems of metropolitan capitalism. It only solved the problem of deficiency of aggregate demand, but not of obtaining primary commodities and raw materials on the cheap: it opened up the possibility that if the newly-independent colonies got together they could raise the prices of such commodities (as happened later with OPEC).


But this latter problem was not of immediate concern since the primary producing third world countries did not get together; the resolution of the problem of aggregate demand, under these circumstances, caused a massive boom, the biggest over a comparable period in the history of capitalism, which is why this period from say 1950 to 1973 has been called “the Golden age of capitalism”.


A major feature of contemporary capitalism is that even this second external prop is also gone. (The State whose intervention had propped up the system is “external” only in the sense of not being directly a part of the base). Globalised finance ensures that the State operates exclusively in its own interests and in accordance with its own caprices; and these demand that the State budget be balanced, with at most a fixed ratio of fiscal deficit to GDP, and that State taxation (of the rich at least) be kept down. Hence the capacity of the State to pursue “countercyclical policies”, eg, a policy of increased State spending in a period of recession, is undermined. The demand for “austerity” in the midst of the current global recession is an expression of this predilection of finance capital, and underscores the fact that this external prop can no longer be used under capitalism.




It may appear strange at first sight that the system undermines in this fashion its own external prop, but since capitalism is not a “planned system”, and since the hostility of finance to an interventionist State (except if the intervention is in its own exclusive interest) is spontaneous, arising from its basic need to preserve its social legitimacy by cultivating the belief that the State cannot do the job of the capitalists, there is nothing strange about it.


Thus the hallmark of contemporary capitalism is that it is without any external prop that can ensure its long-term growth, and hence by implication an early end to the crises, such as the current one, that afflict it.


This does not mean that it will necessarily remain submerged in crisis for ever. What it means is that, first, since getting out of the crisis is no longer something that the availability of external props can quickly ensure, as they did in the “long nineteenth century” (ending with the First World War) or during the so-called “Golden Age” of the fifties and the sixties, it may take long to do so; and, second, when the system does somehow get out of this crisis and a new boom gets generated, since the basis of it will only be the capitalists’ own expectations, rather than anything more solid and tangible like colonial markets or investment opportunities in the “new world” or State fiscal stimulus, its collapse will once again take the system back to square one. There will be no particular reason to expect positive net expansion of the system.


The comparable situation to today’s is the period of the Great Depression when the system was again, temporarily, without any external props. The old colonial system had ceased to play its earlier role (because of the closing of the “frontier”), and State intervention in demand management had not yet come into vogue. The Great Depression ended in Germany and Japan only when the rise of fascism led to increased State expenditure for war preparations, and in the liberal capitalist countries only in the late thirties when the threat of a war unleashed by the fascist powers began to loom large and they in turn increased their military spending.


Today not only is there no external prop actually at hand, but there is not even the sign of one on the horizon. This is unlike during the Great Depression when many were already demanding State intervention and Roosevelt’s New Deal embodying such intervention had already been tried (though hastily withdrawn under pressure from finance).


It is this which constitutes the long-term crisis of capitalism, the fact that the system is in an impasse, without even an inkling of a possible way out. It can at its best only mark time through bubble-based booms and pricked-bubble slumps. When such a bubble will re-form nobody knows; and there is no reason why its re-formation will cause growth of the system.


This has important implications for India. With India being hit by the world crisis, inter alia through a yawning current account deficit on the balance of payments and a tumbling rupee, the government is talking of instituting even more wide-ranging neo-liberal reforms, on the assumption that the world crisis will be over soon. But if this assumption is wrong, then even the bourgeois-theoretic rationale behind this entire neo-liberal policy regime, namely, that it can sustain high growth in the domestic economy, collapses like a pack of cards.