Capital and Imperialism: Theory, History, and the Present

by Utsa Patnaik

  A second contradiction between the concept of a money-using economy and the concept of an isolated capitalist sector arises from the fact that if the sector uses any paper currency, even if deemed statutorily convertible into the money commodity, an increase in money wages, enforced by trade unions for enlarging the wage share, will make the system unworkable. This is because capitalists would naturally resist any decline in their share by jacking up prices, which would trigger an exodus from paper currency to gold, and therefore make the wealth held in the form of paper currency worthless. Since wealth is actually held in the form of paper currency, it follows that there must be something that prevents its value from collapsing even when there are money-wage increases. This “something” has to be located outside the isolated capitalist sector, which means that this sector represents an inadequate conceptualization of capitalism.

  A third contradiction arises between a money-using economy and an isolated capitalist sector, even within the Marxian schema, once we take cognizance that there are a whole lot of goods used by this sector but produced outside it, all of which are subject to the phenomenon of increasing supply price at given money wages.

  Expanded reproduction of the capitalist sector in such a case would run into a cul-de-sac. Ricardo had visualized this dead end as consisting in the arrival of a stationary state, which was the culmination of a process of declining rate of profit. But long before this dead end arrived the value of money would have fallen, since capitalists would try to maintain their rate of profit by jacking up money prices. In this case, there would be no expectation of a return of the value of money to its old level; on the contrary, because everyone would know about the increasing supply price, any initial fall would create expectations of a further fall, so that the value of money will fall precipitously as wealth-holders flee from holding money to holding precisely the commodities that are subject to increasing supply price. Hence to ensure that a money-using economy continues to remain a money-using economy under these circumstances, the phenomenon of increasing supply price must be prevented from making an appearance.

  Ways of preventing increasing prices must involve imposing a certain economic regime upon the outside world from which commodities are imported, for which in turn political control, whether direct or indirect, over this outside world becomes necessary. Looking at the capitalist sector in isolation, and assuming that even when in the natural course of things it buys goods from outside, the idea that we can justifiably analyze its expanded reproduction in its isolated state ceases to be valid.

  Increasing supply price is a matter we discuss in detail in a later chapter. But the point of this chapter is that even the Marxian system, like other theoretical systems, gets beset with serious contradictions if its extraordinarily insightful analysis of a money-using economy is combined with a conceptualization of capitalism as an isolated sector consisting only of capitalists and workers.

  CHAPTER 4

  Capitalism and Its Setting

  We have argued that because capitalism is a preeminently money-using economy any conceptual representation of it as an isolated capitalist sector, consisting only of capitalists and workers, with the state playing no direct role in managing the economy, creates serious logical contradictions. And yet seeing capitalism as an isolated capitalist sector has been the common practice in economic theory. Furthermore, the various ways to overcome these logical contradictions are palpably unsatisfactory. The Walrasian and the Ricardian traditions, for instance, do not even take full cognizance of the fact that capitalism is a money-using economy; they admit only the role of money as a medium of circulation while denying its role as a medium of holding wealth (which itself is a logical contradiction, for money cannot be the one without being the other as well). On this basis these traditions accept Say’s Law and the impossibility of “involuntary unemployment.”

  The Keynesian and Marxian traditions, on the other hand, which do take cognizance of, and see the implications of capitalism being a money-using economy, are hamstrung in other ways by the “isolated-capitalist-sector” perception. Within this perception, they cannot explain how sustained growth occurs within this sector, since such growth requires exogenous stimuli that have to come from outside the sector; and if the perception of capitalism precludes any “outside,” then it ipso facto precludes sustained growth. They also cannot explain how the system accommodates money-wage increases, enforced by workers to raise their share in national income, without jeopardizing the value of money. And as this sector requires a set of commodities subject to increasing supply price (at any given money-wage rate), it is impossible to explain how the system continues to experience expanded reproduction without the value of money collapsing.

  The way out of these logical contradictions is to see capitalism not as an isolated entity, but as one that exists within a setting that it not only interacts with but with the help of which, and at the expense of which, it overcomes all the problems that would otherwise confront it because of its being a money-using economy. Let us see how each of these problems in the context of the Marxian and Keynesian systems (we ignore the Walrasian and Ricardian systems because they do not even come to terms with capitalism being a money-using economy) is overcome once we see capitalism within this broader setting.

  The Problem of Exogenous Stimuli

  The need for exogenous stimuli for sustained growth arises, as we argued in an earlier chapter, because the system is subject to “involuntary unemployment.” Once the possibility of involuntary unemployment is recognized, then, in the absence of exogenous stimuli, capitalists add to capacity only if they expect demand to increase And whether they expect demand to increase depends upon whether it has been increasing, that is, upon current experience.

  If the current period’s demand is such that it gives capitalists their “desired” degree of capacity utilization (Steindl had argued that capitalists always desire to hold some unutilized capacity1), then they take investment decisions that give them a rate of growth of capital stock in the next period that is the same as in the current period. If current capacity utilization is less than “desired,” then they reduce the rate of growth of capital stock in the next period; if it is more, then they increase their rate of addition to capital stock in the next period.

  But the current period’s capacity utilization depends upon the current period’s investment relative to capital stock. It follows that there is some particular rate of growth of capital stock that gives the “desired” level of capacity utilization, and that, if experienced, continues to persist. If the rate of growth of capital stock is less than this, then the economy will keep experiencing a lower and lower rate of growth of capital stock over time, until this rate falls to zero, that is, until gross investment just equals the rate of depreciation of capital stock and the economy reaches a stationary state, or a state of simple reproduction.

  Even if the rate of growth of capital stock exceeds this particular rate, and hence increases over time, because capacity utilization exceeds the desired level, it will eventually hit a ceiling when either the labor reserves or unutilized capacity get exhausted. When it does so, it will not stay at this ceiling; it will keep coming down because capacity utilization keeps falling from this ceiling, until it again reaches a state of simple reproduction.

  Thus, once the effect of demand upon investment is recognized, the economy can only experience two possible trends: a particular growth rate that gives the “desired” level of capacity utilization (which corresponds to what economist Roy Harrod had called the “warranted rate of growth”2), and a zero trend or a state of simple reproduction. The first of these is unstable in the sense that a chance deviation of the rate of accumulation in either direction from this trend takes the economy to simple reproduction; the second, simple reproduction, is stable in the sense that a chance deviation from it brings the economy back to it.3

  Purely on the basis of endogenous stimuli therefore, that is, on the basis of the impetus for
growth that arises from the fact that the economy has been growing in the past and hence is expected to grow in the future, we cannot explain sustained growth in the system.4 Such growth requires some additional, exogenous, stimuli, which add an amount to investment that is unrelated to the growth occurring in the past.

  Now, there has long been a view that even an isolated capitalist sector generates exogenous stimuli from within itself through innovations, which raise the level of gross investment, and thus net investment, beyond what would otherwise be warranted by the expected growth of markets alone. This, however, happens only if those introducing innovations undertake some extra investment, over and above what the expected growth of the market would have otherwise warranted, in the belief that they would be able to sell more because they introduce an innovation their rivals lack.

  But in a situation where the rivals are strong enough to resist a snatching away of their market, and, despite not introducing the innovation, can still resort to and survive price cuts if the innovator among them lowers prices on the strength of the innovation, snatching away any market becomes impossible. And the innovator, knowing this, will not make any extra investment over and above what the expected growth in its market would warrant. An innovation will only affect the form that investment takes—for example, new innovated machines rather than the old machines—but not its amount, in which case it ceases to be an authentic exogenous stimulus.5 The rivals, in turn, will feel the need to innovate because of the original innovation, but they too will introduce innovated machines for old machines without raising the amount of investment. Innovations do not act as an exogenous stimulus increasing investment beyond what the growth of the market would have dictated; on the contrary, the growth of the market determines the pace of introduction of innovations.

  Economic historians, as we have discussed earlier, have been saying this for some time. Several innovations that had become available during the interwar period waited to get introduced until after the Second World War boom was underway, which is attributed by W. Arthur Lewis to the dampening effect of the Great Depression on the tendency to introduce innovations.6 If a period of deficiency in demand dampens the introduction of innovations, then innovations clearly are not playing the role of an exogenous stimulus.

  Baran and Sweezy made a distinction between routine innovations and “epoch-making” innovations like railways and automobiles.7 They had thought that the latter could provide an exogenous stimulus to growth, but not the former. It is significant, however, that the automobile, whose spread after the First World War could have been expected to thwart the onset of the Great Depression, or to have truncated the depth and the duration of the Depression after it had set in, failed to do so. It was only in the post–Second World War boom that automobile sales spread dramatically. One has therefore to take the potential of even these epoch-making innovations to thwart the onset of, or to break out of, a state of stagnation with a degree of skepticism. In short, innovations are poor examples of an exogenous stimulus.

  No doubt, booms have been characterized by vigorous adoptions of innovations, which give the impression of innovations causing the boom itself, but this is more likely to be a case of mistaken identity. Booms initiated by other, genuinely exogenous stimuli have called forth a vigorous spread of innovations, but there is little evidence of innovations themselves initiating a boom. The obvious exception to this is when the introduction of innovations has been supported by the state, as the introduction of the railways was over much of the nineteenth century. But here it is the state that should be seen as providing the exogenous stimulus rather than the innovations themselves.

  If we leave aside innovations, then the only two genuinely exogenous stimuli are state expenditure and the imperial arrangement, which was the focus of Rosa Luxemburg’s analysis. While both entail breaking out of the conceptualization of capitalism as an “isolated capitalist sector,” it is the imperial arrangement, emphasized by Luxemburg, that has played the role of an exogenous stimulus over much of capitalism’s history.

  By “imperial arrangement” we mean something more than just the colonial markets. Incursions into the colonial markets were part of the imperial arrangement, but this arrangement must be seen in its totality. We have to distinguish, to start with, between the colonies of conquest, such as India, Indonesia, Malaya, and the West Indies (and semi-colonies like China), and the colonies of settlement like the United States, Canada, Australia, and New Zealand. Sales of goods produced by metropolitan capitalism to the former at the expense of their local crafts producers, who were driven out of their traditional occupations as a result (a process called “deindustrialization”), was an important part of the imperial arrangement.

  But it is not as if all metropolitan capitalist countries made use of such colonial and semi-colonial markets. Britain, as the leading capitalist country and colonial power, accessed these markets, which economic historian S. B. Saul calls “markets on tap,”8 and allowed other capitalist countries, especially the newly industrializing ones, to access its own markets. All capitalist countries therefore had access to the colonial and semi-colonial markets, whether directly, or indirectly via Britain.

  In the colonies of settlement, on the other hand, the indigenous inhabitants were driven off their land, which got occupied by migrants from Europe. Many local inhabitants perished, and those who survived were herded into reservations. An enormous migration of white persons from Europe, around fifty million in the period between the end of the Napoleonic Wars and the First World War,9 occurred. And along with such migration of persons, there occurred a complementary migration of capital for setting up railways, creating infrastructure, and pushing the frontier further outward.

  Now, it may appear at first sight that this spread of metropolitan capitalism from Europe provided the exogenous stimulus so that the tropical and subtropical colonial and semi-colonial markets played no essential role in this respect. However, this is not true. The commodity-composition of demand from these new regions of settlement was different from what could be supplied from the European metropolis, and this mismatch became increasingly acute as these regions got industrialized and started exporting manufactured goods to Europe. The colonial and semi-colonial markets were essential to resolve this problem. For instance, Britain in the nineteenth century increasingly sold goods in the colonial and semi-colonial markets (historian Eric Hobsbawm uses the term “flight to colonial markets” to describe this phenomenon)10 and got them to export their goods to the temperate regions of white settlement in order to balance its payments through this triangular pattern of trade..

  But that is not all. Britain got its colonies like India to export more goods than they absorbed (and such absorption too was at the expense of their own local craftsmen), and this surplus, in the form of raw materials and other primary products, was simply appropriated by Britain to pay for its own capital exports to these regions. This surplus, in other words, was not credited to the account of the colonized countries. It was taxed away from them by the colonizing power, a phenomenon called the “drain” of surplus, to finance its own capital exports.11

  The colonial and semi-colonial markets, in other words, did not play the role of providing an exogenous stimulus in the simple and obvious manner visualized by Rosa Luxemburg. The markets became part of an overall imperial arrangement that kept the process of accumulation going by providing it with an exogenous stimulus. But, in order to understand this arrangement and how sustained accumulation could occur under metropolitan capitalism, we need to break out of the conceptualization of an isolated capitalist sector.

  Let us clarify the respective roles of exogenous and endogenous stimuli. One has to distinguish between the quantitative and the qualitative importance of the exogenous stimuli. Even though these stimuli are qualitatively important, in the sense that in their absence the isolated capitalist sector would experience only simple reproduction, its actual growth rate, in the presence of such stimuli, would b
e larger than the rate of growth of capital stock directly engendered by such stimuli, just as the size of output in any period of time would be much larger than, say, the sales to the pre-capitalist sector per se because of the multiplier effect. This therefore may create an optical illusion that exogenous stimuli are not very important, when in fact the opposite is the case, and the system would be mired in stagnation in their absence.

  The Cushion Against Inflation

  Let us now look at the case of money-wage increases. We argued earlier that in an isolated capitalist sector, if money wage-increases occurred in an effort to increase the workers’ wage share, then such increases, in the face of capitalists’ resistance to any cut in their profit share, would destabilize the value of money. Because in this scenario the value of money did not actually get destabilized, this could only be possible if no money wage increases were enforced by workers in excess of productivity increases or if capitalists meekly accepted cuts in their profit share. Neither of these being the case in reality, it followed that there was a logical incompatibility between a money-using economy (where the value of money does not get destabilized), which capitalism preeminently is, and its representation as an isolated capitalist sector.