by Utsa Patnaik
But if we get out of the conceptualization of an isolated capitalist sector, then the problem of destabilization of the value of money owing to money wage increases does not arise. If there exists a class of claimants on total output who cannot defend their share in it, then the competing claims of workers and capitalists can always be reconciled at their expense. Workers can indeed obtain money-wage increases in excess of labor productivity growth that are not simply “passed on,” in the sense that prices do not increase in tandem with the increase in unit labor costs, for if that happened then their share in output could not increase. They can therefore succeed in enlarging their share of output. And this cannot happen through a reduction of the capitalists’ share in output, but through a reduction in the share of this other group of claimants.
This is not to suggest that workers consciously squeeze the shares of these other claimants. But the system works in such a way that the higher-money wage demands of the workers are accommodated at the expense of these claimants without jeopardizing the capitalists’ share. Put differently, the claims enforced by both the workers and the capitalists can be met without causing accelerating inflation and a destabilization in the value of money if there is another category of claimants that acts as a mere “price-taker.” Locating capitalism within a broader setting, where purchases are made of raw materials, current inputs and even foodstuffs from a group of producers who lack any bargaining strength and therefore have a claim on output that is compressible, is an essential condition for the viability of the system.
The reason the claim of this group is compressible is obviously because it is located within an ocean of labor reserves that forces its members to act as price-takers. And this has always been the case with capitalism, which has obtained a set of goods from petty producers outside of the metropolitan center. The deindustrialization that capitalism had imposed upon the outlying economies in its quest for markets created an enormous mass of unemployment. This made it possible for the petty producers to pass on the burden of reduced claims on output to which they were subjected to those lower down, namely the laborers they employed. In addition, even when they did not employ laborers, any resistance to reduced claims on their part became impossible since they could not get organized. Given the large labor reserves, any attempt at organization on their part would mean that the landowners (who are not the same as the petty producers) would replace them with others waiting in the wings.
We referred earlier to Keynes’s idea of the “money illusion,” which was essential in his schema for the stability of the wage-unit despite that employment could rise through an increase in aggregate demand. It is not some psychological trait of the workers, some limitation on their part that makes them fixated on money wages. Money illusion, which has the effect of making the workers’ share compressible, is an ill-founded concept (which is why monetarism could carry out a counterrevolution against the Keynesian Revolution with such ease). The real reason why the share of workers is compressible is because of the existence of a vast labor reserve. This exists mainly in the outlying regions, outside of the capitalist sector proper, and afflicts not all workers employed by capital (for then we would not see any trade unions at all, let alone successful wage increases enforced by them), but only some workers (or more accurately petty producers), those located in these outlying regions and supplying the capitalist sector with numerous products it requires. But to recognize their presence, we have to abandon the conceptualization of capitalism as an isolated sector and see it in its overall setting, located amid a set of petty producers that meet its demands for their goods.12
The point at issue can be seen as follows. If the product of the capitalist sector has price p and is produced with the help of labor that gets a money wage rate w, and raw materials “imported” from outside the capitalist sector which have a price m per unit (in the currency of the metropolis), then we have:
p = (am+wl) (+π)…(i)
where a and l denote respectively the raw material and labor required per unit of output and π the markup factor. The above equation can be alternatively written as:
l= (am/p+wl/p)(1+π)
It is clear that the share of wages in output wl/p can be increased without any fall in the share of profits (π/(1+π)) if the share of the raw material producers (am/p) is driven down; that is, if the raw material producers allow this to happen (because they are price-takers).
The same result, namely successful increases in the money wages of one group of workers being accommodated by the system through the compression of the share of another group of workers, without destabilizing the value of money, could be achieved even if both groups were located within the isolated capitalist sector. But a sustained and even a growing dichotomy between two groups of workers who are in close geographical proximity with free mobility is difficult to preserve. Besides, squeezing workers who are employed directly by capital, even those who are unorganized, has limits, since capital also has to ensure that there is a continuous flow of labor-power, which is endowed with a certain minimal strength and ability. But petty producers, located outside its frontiers amid an ocean of labor reserves, so that one group can be replaced by another without much inconvenience to capital, are quite another matter. They constitute an “ideal” group upon which a squeeze can be imposed (not necessarily directly but mediated through the market) to ensure the stability of the value of money.
It is remarkable that with so much written on the theory of inflation in the last few decades, hardly a word has been said on the possibility of inflation being controlled through a squeeze on the primary-commodity-supplying petty producers. So committed has economics become to the vision of an isolated capitalist sector that, working within this paradigm, it even declared that there was only one level of unemployment (NAIRU) at which the economy could experience non-accelerating inflation. (It could experience non-accelerating inflation at unemployment rates higher than this unique one if there were ratchet effects to prevent decelerating inflation, that is, if capitalists did not allow prices to fall in absolute terms; at all such rates there would be no money-wage increases.) The possibility of the economy settling down at any one of a set of possible unemployment rates, with varying money-wage increases associated with each, such as what Phillips found and what corresponds to the reality of capitalism (no matter what one thinks of the theory in support of the Phillips Curve), is simply brushed aside.
But once we go beyond the isolated capitalist sector idea, and see capitalism as ensconced within a setting of pre-capitalist producers that were enlisted for supplying some requirements it cannot produce, then it follows that for every level of the terms of trade (m/p in the above example), there would be a corresponding NAIRU. There is not one unique NAIRU, but a multiplicity of them. What is more, if the claims of these petty producers are compressible, then the economy can settle at any level of unemployment without being plagued by accelerating inflation, exactly as Keynes had visualized, though for the wrong reason (namely, money illusion).
Michal Kalecki’s work was significant for its explicit introduction of distant raw material producers into an analysis of capitalism, though he did not carry this to its logical conclusion.13 In fact, he explained the alleged stability of the share of wages in the national income of metropolitan capitalist economies as the outcome of two factors pulling in opposite directions14: a rise in the “degree of monopoly” (the markup margin), which has the effect of lowering the wage share in the national income, and a fall in the ratio of raw material prices to unit wage costs, which has the opposite effect. This theory was a breath of fresh air, especially in contrast to the contrived explanation in terms of the Cobb-Douglas Production Function, which apart from all its logical infirmities arising from capital being a value-sum, is also afflicted by the logical problems we have been discussing (such as assuming Say’s Law), for it sticks stubbornly to the idea of an isolated capitalist sector.
Kalecki, however, did not see the fall in raw ma
terial prices relative to the unit wage-cost as being caused by, say, the increase in the degree of monopoly. In other words, he saw the two factors he highlighted as operating independently of each other; the alleged constancy of the share of wages was a happenstance because the effects of these two forces acting in opposite directions happened exactly to balance each other. But he did not go further to talk of the system stabilizing itself through effecting a reduction in raw material prices relative to unit wage-cost as an offset against the rise in the degree of monopoly.
To say this, of course, does not mean a planned move on the part of the system, to turn the terms of trade deliberately against the raw material producers to ensure that the wage share did not fall as a consequence of the rise in the degree of monopoly. The “spontaneous” working of the system in a world where there are price-takers would automatically bring about such a denouement. This can be seen in the following example.15
Suppose workers bargain for, and obtain, a money-wage that gives them at an expected price pe a certain target share of output, which, at any given level of trade union organization, is a function of the employment rate e, but raw material producers lack this strength. They bargain and obtain a share of output but only at, say, last period’s price. Then we can alter (i)to
in which (aμ) is the targeted output share of the raw material producers. Their actual share however equals (aμ pt-1/pt), which means that the higher the rate of inflation the lower is their actual share. Now, assuming that
which is a case of adaptive expectations, at any given level of employment e and any markup margin in the capitalist sector there would be a unique rate of steady inflation and hence a unique actual output-share of the raw material producers. This steady inflation rate will be:
If there is an increase in the degree of monopoly, then the employment rate can remain unchanged and the share of workers remain unchanged. but since the right-hand side in (ii) goes up, there will be an increase in the new rate of steady inflation and therefore a lower share of the raw material producers. Here the share of raw material producers would have fallen spontaneously to offset the effect of the rise in the degree of monopoly upon the workers’ share.
The period from the last quarter of the nineteenth century to the Second World War was characterized by an adverse shift in the terms of trade between manufacturing and primary commodities against primary commodities.16 This was also the period in which the wage share is supposed to have remained more or less constant even as the degree of monopoly increased. These two factors, namely the rise in the degree of monopoly and the shift in the terms of trade against primary commodities, instead of being two independent phenomena, were related. The rise in the degree of monopoly increased the mark up margin, but workers in the metropolis could prevent a fall in their share by bargaining for and obtaining higher money wages; this process did not cause accelerating inflation because the terms of trade could be shifted against primary commodity producers, who were price-takers and whose share in output was compressible. Hence, the fact that a secular rise in the degree of monopoly did not destabilize the value of money under capitalism, despite a near constancy in the share of wages, is because capitalism was not identical with an isolated capitalist sector, but was embedded within a group of price-taking petty producers.
Concluding Observations
Of course, as the share of the primary producers in the total value of output declines, a further compression in this share becomes more difficult. Hence turning the terms of trade against primary commodities as an instrument for stabilizing the value of money in the event of a rise in the degree of monopoly at a given unemployment rate (and hence wage-share), or in the event of a rise in workers’ money wages in excess of the rise in labor productivity, with the markup being given, loses its efficacy. When the share of the value of primary products in the total value of the output produced is extremely small, a compression in this share can hardly act as an effective counter to accelerating inflation that any change in these factors can initiate.
But the fact that a certain factor becomes less efficacious in playing the role of a stabilizer does not mean it has been absent. It is only by recognizing the role it has played in the past that we can see the problems that late capitalism faces in stabilizing the value of money, problems that manifest themselves for instance in its maintaining on average higher levels of unemployment than in the immediate post–Second World War period. The point is that whatever changes may be occurring within the capitalist system, it simply cannot be analyzed as it has been in various strands of economic theory as an isolated sector that is not entrenched within a certain setting.
Finally, the analysis of capitalism as an isolated capitalist sector creates serious problems for another reason. It completely ignores the phenomenon of increasing supply price for many of the primary commodities it uses. This phenomenon is extremely important but can be appreciated only when we see capitalism in its overall international setting. We take up a discussion of this phenomenon in the next chapter.
CHAPTER 5
Increasing Supply Price and Imperialism
David Ricardo was the first major economist to have incorporated what he called “diminishing returns” into a theoretical analysis of capitalism.1 Since “diminishing returns” is a misleading term that can be mistaken to mean “diminishing returns to scale,” which, strictly speaking, is a logical impossibility. Since a production unit can always be replicated instead of building one twice as big for doubling output, we prefer to use the term “increasing supply price” (at given money wages). Increasing supply price is acknowledged to affect primary commodities, among which minerals, especially oil, have received much attention. As an exhaustible resource, greater and greater exploitation not only leaves less for further exploitation, but also entails an increasing supply price because the more easily exploitable sources of supply are presumed to be used up first.
Marx had opposed this last presumption.2 He saw no reason why, taking Ricardo’s example, the more fertile land would get cultivated first by people entering an island. It was much more likely that the land closest to the shore would be first cultivated, and as the settlers moved farther inland they may chance upon land of greater fertility, in which case the supply price would not increase steadily but would move up and down around a trend that has no reason not to be flat.
Marx is perfectly right in what he says about the island example, but this example is misleading. To see this, we must remember that oil and other minerals are the “leading species of a large genus” (to paraphrase Alfred Marshall), which includes products of the tropical and semi-tropical landmass. In the case of these products, we are not talking about virgin territory being settled, but territory upon which millions have lived for millennia, and which, even if not fully used up to start with, does get used up as the demands of the capitalist metropolis are met. That is, the more easily cultivable land gets used up, pushing the margin toward less accessible and less fertile land. Increasing supply price, and even a near-vertical supply curve, in the case of such products is thus a perfectly realistic presumption. In this chapter we consider the issue of increasing supply price, especially in the case of tropical and semi-tropical products that are not producible everywhere, that have a family resemblance with oil in this regard, but have scarcely got the attention they deserve.
Land Augmentation and the State
Just as there would be no increasing supply price if land of equal fertility was available aplenty, there would be no increasing supply price if technological progress of the “land-augmenting” kind could occur easily. In fact, even if there were no technical progress, in the sense of the arrival of entirely new methods of production and new practices, but investment, such as irrigation, which allows multiple cropping and thus increases the effective supply of land, could occur to the required degree, there would again be no cause for increasing supply price. So, when we talk of increasing supply price as a problem facing the capitalist se
ctor, we are asserting that land-augmenting investment and land-augmenting technical progress do not occur to the required degree. The question is, why not?
Before answering, we should be clear about the social setting of our discussion, which is provided by a number of elements. First, capitalism, which developed in the temperate region of the world, Europe, and got diffused to the temperate regions of white settlement in North America, Australia, and New Zealand, uses a whole range of goods produced in the tropical and semi-tropical regions of the world, which it can neither produce itself or produce in adequate quantities, nor do without.
When we say it cannot produce, we also include the case where it can produce the products in one season but has to import them in the other part of the year from the tropical and semi-tropical regions that can produce them at that time. We also include the case where certain products can be produced, and are produced, in the capitalist metropolis but the requirement of the metropolis for these products far exceeds what it can itself produce, so that at the margin the entire additional supply has to come from the tropical and semi-tropical regions. In short, there is a whole range of goods the metropolis cannot do without but whose supplies at the margin must come from the tropical and semi-tropical regions.
Secondly, within the tropical and semi-tropical regions, it is largely a group of peasants who are engaged in the production of these goods. In the densely populated tropics, a replication of what was done to the original inhabitants of the temperate regions when European migration occurred to these regions, is not possible. Besides, the tropics are not the region to which much European migration occurs. We therefore have a situation where the old practices and the old modes of production continue, but metropolitan capital simply uses them for its own purposes. The sheer scale of disruption involved in displacing the existing peasant producers and taking over their lands for capitalist cultivation is so large that capital is not too keen to embark upon it. We thus have capital using peasant production for its own purposes in the tropical and semi-tropical regions to produce a whole range of goods that it requires, but from a landmass that is already largely cultivated.