Capital and Imperialism: Theory, History, and the Present

by Utsa Patnaik

  It follows that although profit inflation can play a role in extracting supplies for the metropolis out of a given output of tropical goods, this role can only be a limited one. It must not cause anything more than what we called earlier the threshold rate of steady inflation in the periphery (accompanied by a depreciation of its nominal exchange rate). It has to be supplemented by something else, some other means of demand compression in the periphery. We call this “income deflation.”

  Income deflation achieves the same result as profit inflation but without raising prices. Take a simple example: suppose a certain amount of goods must be squeezed out of the consumption of the workers. (This is called “forced savings” in the literature, though it must be remembered that the benefits of such “savings” squeezed out of the workers in the form of additions to wealth accrue not to them but to the capitalists.) This squeezing out requires a fall in the real wage rate of the workers, but this fall can be effected in two ways: one, which is the way of profit inflation, is by an increase in price relative to the money-wage rate; the other is by a reduction in the money-wage rate relative to the price. This is an income deflation imposed on the workers, and has the advantage from the point of view of capital that it achieves the same end as a profit inflation without in any way threatening the value of money and money-denominated assets.

  Income deflation, which, in the example above took the form of a wage deflation (as we were assuming that the universe was peopled exclusively by capitalists and workers), would release tropical products for the metropolis even out of a given and inflexible supply. For this it must be imposed on segments of the population in the periphery that consume such products.

  Income deflation can, of course, be imposed on the workers within the metropolis itself, but there are limits to the extent that real income can be squeezed in the face of increasing supply price of tropical products, since capital requires an adequate supply of labor-power of a certain ability for its direct employment. When it comes to the working population of the periphery, it is under no such compulsion to maintain their real living standard, even at a pre-given subsistence level. Hence, income deflation on the working population in the periphery is an essential feature of the arrangement that the metropolis imposes on the periphery.

  This arrangement, of keeping the periphery open to trade, keeping the periphery open to capital flows, having some mechanism whereby the production structure of the tropical landmass can be controlled, and imposing income deflation on the working population of the periphery, is capitalism’s way of combating the effect of increasing supply price. And this arrangement is an integral part of “imperialism,” which entails the subjection of the periphery to a regime that keeps it open to trade and capital flows and allows metropolitan capital to dictate the production pattern on its landmass, while imposing income deflation on its working population.

  The nature of this regime, how it has changed over time through the different phases of capitalism, the different mechanisms through which income deflation has been imposed on the working population of the periphery, are matters that we will discuss in detail in the chapters that follow. The point here is to emphasize the theoretical necessity of such a regime. Instead of the conceptualization of capitalism as an isolated capitalist sector, it must be seen as a system that exists within a setting of precapitalist producers who were entrapped within certain social relations of their own but are enlisted for its own purposes by capital, which molds these relations and imposes a regime of the sort we have just described upon this setting.

  A Word on Imperialism

  We have argued that because capitalism is a preeminently money-using economy, any conceptualization of it as an isolated sector is untenable. This is because a money-using but isolated capitalist sector would be trapped in a state of simple reproduction, that is, a (stationary) state of zero trend rate of growth; it would not be able to accommodate increases in money wages without jeopardizing the value of money; and it would not be able to prevent a collapse of the value of money in the face of increasing supply price. But once we conceptualize capitalism within a setting of precapitalist producers who are enlisted to serve its own purposes (so that they no longer remain in their pristine state), these problems disappear.

  Encroachments into the markets of pre-capitalist producers enables the capitalist sector to find the exogenous stimulus to break out of the state of simple reproduction and to keep the process of accumulation going in a sustained manner. Additionally, the existence of a group of suppliers of wage goods and inputs to the capitalist sector, located in the midst of vast labor reserves created by the displacement of craft producers owing to the entry of capitalist products (or deindustrialization), makes them price-takers and serves to stabilize the value of money even in the face of metropolitan money-wage or profit margin increases.

  These two roles of the pre-capitalist setting within which capitalism is located, however, become less and less significant over time. Once pre-capitalist craft production dwindles, the scope for capitalism to energize itself through encroachments upon it also gets exhausted. Likewise, once the share of primary producers in the total value of output of the capitalist sector dwindles, precisely because this share is compressible and has been compressed in the past, the ability of the system to stabilize itself by compressing this share still further declines.

  This does not mean that capitalism has no further reason, on the basis of these considerations, to control this setting. Whether or not these can play the role of providing capitalism with exogenous stimulus or stabilizing the value of money in the same manner as done earlier, the question of capitalism letting go of its control simply does not arise, since any such letup would plunge the system into a crisis. These mechanisms not being as efficacious in playing the role they had done before is one thing; their being dispensable is an altogether different matter.

  The question of imposing a regime upon this pre-capitalist setting to ward off the threat of increasing supply price stands on an altogether different footing. It continues to be essential for capitalism, not just as a legacy of the past but as a requisite for the present as well. In this sense it is central to the phenomenon of imperialism.6

  Capitalism has changed so much that many are of the view that the term imperialism has lost its relevance altogether. No doubt, compared to the colonial era, two fundamental changes are discernible at present: one is the emergence of countries like India and China into the ranks of economic powers, with their bourgeoisies integrated into the corpus of global capital. The other is the virtual stagnation or even decline in the real wages of the workers in the advanced capitalist countries over a period of almost half a century. This suggests to many that the old dichotomy between the North and the South, or between “advanced” and “underdeveloped” or “backward” countries, which the term imperialism invoked, is no longer valid.

  While this change in capitalism is certainly of great significance, conceptualizing imperialism in terms of a North-South dichotomy, or of an advanced-backward country dichotomy, with the former exploiting the latter, is flawed. Imperialism is a relationship between capitalism and its setting, central to which is an imposition of a regime upon the setting that entails income deflation as a means of preventing the threat of increasing supply price. No matter what happens to the bourgeoisies of the South or the workers of the North, this relationship, which existed in the colonial era, persists to this day and the system cannot do without it. But though the content of this relationship remains unchanged, the form of it has changed over time.

  PART 2

  CHAPTER 6

  Periods in Capitalism

  The isolated capitalist sector that much of economic theory has been concerned with consists of the capitalists and the workers, with the state ensuring that the rules of the game are followed, though not intervening directly in the economy. Going beyond this isolated capitalist sector to understand the real nature of capitalism entails, therefore, locating it w
ithin its setting amid pre-capitalist producers that are enlisted for its own purposes, which thereby destroys their pristine character. But it also means introducing the state as an active participant in economic processes.

  Indeed, we cannot introduce the one without also introducing the other. Colonialism, which entailed the subjugation of the pre-capitalist setting within which capitalism emerged, relied on the use of military power by the capitalist state (though on certain occasions, as in India under the rule of the East India Company, the capitalist state may have subcontracted its power to another entity, namely a capitalist enterprise). Even though direct state intervention in “demand management” was a post–Second World War phenomenon, state intervention in economic life through protectionism and through the acquisition of colonies and dependencies, or “economic territory” as Lenin expressed it, has been a feature of capitalism throughout its life. And this intervention goes far beyond what economic theory generally recognizes, namely ensuring that the rules of the game are followed.

  The precise manner in which this setting—consisting of the state (or the group of capitalist nation-states existing with a certain relationship among them) and the pre-capitalist universe within which this state enables capitalism to ensconce itself—affects the functioning of capitalism has changed through the history of the system. We shall break up this history into different periods, within each of which the impact of the capitalist setting is analytically invariant, though across periods there are differences. In this chapter, we examine each of these periods briefly, to give a bird’s-eye view of our overall argument. In later chapters each of these periods will be discussed at length.

  The periodization we follow is: (1) Colonialism prior to the First World War; (2) the interwar years; (3) the post–Second World War years of the “Golden Age of Capitalism”; (4) the era of globalization; and (5) the current conjuncture, which marks the dead end of globalization. The logic of this periodization will become clear as we go along.

  The Colonial Arrangement and Its Exhaustion

  The colonial period, right until the First World War, though it may not have witnessed as high an economic growth rate as during the quarter century after the Second World War, was marked by the most prolonged boom experienced by the system until now. The colonies of conquest enabled the leading capitalist country of the period, Britain, to sell its goods in their markets as if, in the words of economic historian S. B. Saul, they were “markets on tap.”1 These goods were no longer much in demand in the newly emerging capitalist countries of the time since they were developing their own manufacturing. Britain could therefore keep its own market open to their goods, and yet not face any balance of payments difficulties, because it could exploit the colonial markets. By thus accommodating their ambitions, it could keep them within the international economic system characterized by the gold standard and dominated by itself, instead of having to face a possible revolt by them against itself.

  Not only did Britain balance its payments through this triangular trade, whereby it sold its goods to the colonies, while the colonies’ goods were sold to the newly emerging capitalist powers, which in turn had a trade surplus vis-à-vis Britain; but it actually made substantial capital exports that sustained this diffusion of capitalism to the newly emerging capitalist countries. These capital exports were financed by the forcible extraction of a surplus without any quid pro quo from the colonies. This extraction was effected through taxes levied on the colonial economy, with the tax revenue simply being siphoned off in the form of an export surplus of commodities.

  Both the deindustrialization of the colonial economy that resulted from the sale of metropolitan goods, and the “drain of surplus” from the colonial economy through the taxation system, had the effect of imposing an income deflation on the working population of the colonial economy, which also meant that the impact upon the system of increasing supply price, or even of a fixity of output from the given tropical landmass, could be warded off.

  The colonial arrangement was thus an ideal one from the point of view of capitalism. It permitted a diffusion of capitalism to the temperate regions of white settlement; it permitted the maintenance of stability in the value of money in the metropolis and even in the periphery despite the fixity of the tropical landmass; and it kept up the level of aggregate demand for the system as a whole.

  But for reasons we shall elaborate in detail later, this arrangement could not last. Colonial markets have obvious limits, so that the arrangement could not have lasted in any event. Besides, Japanese competition after the First World War in the markets of Britain’s Asian colonies brought this arrangement to grief. Britain tried for a while to ward off that competition through forming an alliance with the domestic bourgeoisies that were coming up in these colonies (of which the grant of a limited amount of “discriminating protection” to Indian capitalists was an example). However, this did not bring any comfort to the position of Britain. With the onset of the world agricultural crisis in 1926, the entire colonial arrangement upon which the long Victorian and Edwardian boom had been founded collapsed, though colonialism itself continued and was used for financing war expenditure during the Second World War with inordinate ruthlessness, of which the Great Bengal Famine of 1943, exacting a toll of three million lives, was a grim manifestation.

  The explanation of the Great Depression that follows from this analysis is completely different from the explanations that usually figure in economic theory, including even in Marxist theory. This is not to say that those explanations lack substance, but rather that an important element of the picture we are concentrating on is missing from those explanations. The chief explanations have been Joseph Schumpeter’s,2 coincidence of the troughs of the three types of business cycles—the Kondratieffs, the Juglars, and the Kitchins; Alvin Hansen’s3 “closing of the frontier”; and Baran and Sweezy’s,4 the rise of monopoly capitalism. Baran and Sweezy’s explanation is based on a long tradition of rich theoretical work that has been associated with Kalecki and Steindl, apart from the two authors themselves.

  In any of these explanations, however, the role of the exhaustion of the colonial arrangement has not figured. This, in turn, is because the role of colonialism in sustaining the long boom of the long nineteenth century has itself not been adequately recognized. Once we grasp the role of colonialism in sustaining the boom then we are in a position to recognize the importance of the end of this role in precipitating the Depression.

  Charles Kindleberger,5 the most prominent historian of the Great Depression, has written of it coinciding with a period when Britain had lost its leadership role in the capitalist world, while the United States had not yet taken up this role. But behind Britain’s losing the leadership role was the exhaustion of the colonial arrangement that had sustained Britain until then.

  The logic of our periodization that demarcates the pre–First World War from the interwar years lies not just in a temporal division, nor in a division between a boom period and a slump period. It lies in the fact that the colonial arrangement that had sustained capitalism for so long was getting exhausted without any other arrangement taking over. The Great Depression was a manifestation of this phenomenon.

  The “Golden Age” Years

  A new arrangement came into being in the post–Second World War period, but it did so in different ways in the United States and Europe. The Great Depression came to an end in non-fascist countries, that is, outside of Japan and Germany where militarism had allowed an early recovery, only with the arms buildup on the eve of the Second World War. The brief recovery provided by the New Deal of Franklin Roosevelt in the United States was scuttled by the return to policy orthodoxy that precipitated the 1937 downturn, a kind of depression within a depression. On the eve of the war, while capacity utilization in the consumer goods industries was quite high, the producer goods industries were marked by huge unutilized capacity.6 The boost to military expenditures for the war improved capacity utilization in that sector as
well.

  The United States, which had not been as devastated as the European countries and where the balance of class forces had not witnessed as decisive a shift in favor of the working class, persisted with large military expenditures even after the war, both because of its new role as the leader of the capitalist world confronting the “twin threats” of communism and national liberation movements, and also because this appeared to be the easiest mechanism, already in place and not treading on the toes of any capitalists, for maintaining a high level of employment.7 A return to prewar unemployment levels was obviously unthinkable, because of the threat to capitalism it would have entailed (of which Keynes was acutely aware); hence what some writers have called a “military Keynesianism” came into vogue in the United States, which Marxist writers like Baran, Sweezy, and Magdoff highlighted in several studies.

  In Europe, however, the trajectory was different. The continent was devastated. The working class had emerged from the war having made enormous sacrifices, and it was determined not to go back to the prewar years of unemployment and distress. It greatly increased its class strength, of which the defeat of Winston Churchill in the postwar elections in Britain was the clearest sign. The system could not go back to its old ways, and the presence of the Soviet Union next door posed a serious threat to the ruling classes.