Capital and Imperialism: Theory, History, and the Present

by Utsa Patnaik

  It was essential for European capitalism to make concessions, to modify the system in significant ways in order to ward off this threat, and three crucial concessions were made. First, the adoption of state intervention in demand management, which Keynes had long been advocating; second, decolonization, at least at a political level (economic decolonization, entailing a relaxation of control over the resources of the colonies, had to await another round of struggles, often bitter ones, such as the Anglo-French invasion of Egypt in the wake of Nasser’s nationalization of the Suez Canal); and third, the introduction of universal adult franchise. In Britain, something close to universal adult franchise had been achieved in 1928 when women won the vote, but even in France universal adult franchise was introduced only in 1945.

  The upshot of these changes is that unlike the military Keynesianism of the United States, European Keynesianism took the form of substantial welfare state expenditure under the aegis of Social Democracy. No doubt much of this expenditure was financed through the taxation of workers themselves;8 nonetheless it entailed a net redistribution of income in an egalitarian direction through fiscal means, which was not just desirable per se but kept up the level of aggregate demand, even after the effects of the postwar reconstruction boom had worn off.

  High aggregate demand, which kept down unemployment rates to levels never experienced under capitalism in peacetime, also stimulated high rates of investment and economic growth, and hence high levels of labor productivity growth. This growth was aided by several innovations developed in the interwar period but kept in abeyance because of the depressed economic conditions that were now introduced into the production process. Because of the low unemployment rate—which induced migration from the former colonies and dependencies, such as of Indian, Pakistani, and West Indian workers into Britain, Algerian workers into France, and Turkish workers into Germany—trade unions could enforce high rates of wage increase in the face of high labor productivity growth. The condition of workers, both because of wage increases and welfare state measures, improved significantly—hence the term “Golden Age of Capitalism”—and the point began to be made that “capitalism had changed,” that it had turned over a new leaf.9

  The postwar arrangement, however, had an obvious lacuna in the light of our previous discussion. It contained a substitute for the old colonial arrangement in the matter of finding a market for the products of the capitalist metropolis, and that was the demand generated by the state. Kalecki was to call sales to the state against a fiscal deficit an “export surplus” of the capitalist sector to the state.10 And even when there was no fiscal deficit but a balanced budget maintained by the state, the multiplier effects of such a balanced budget could keep up aggregate demand. In short, the “market on tap,” which the colonial arrangement had provided in the pre–First World War years, was now provided by the capitalist state.

  Schumpeter, in an assessment of Keynes’s Economic Consequences of the Peace, sees it as expressing the position that the stimulus to capitalism provided by the pre–First World War arrangement had come to an end and that capitalism had to obtain a new stimulus which could only come from the state.11 (Keynes, of course, was not talking about colonialism.) This perception, developed in his later theoretical work, but not taken seriously before the Second World War because of the opposition of finance, not even in the United States, where the switch to the New Deal strategy was far from thorough, can be said to have been realized in the postwar period.

  But what the postwar arrangement did not have was any means of imposing income deflation upon the working people of the periphery to prevent the effects of increasing supply price from jeopardizing the value of money. Political decolonization removed from the armory of the capitalist sector the weapon of tax-enforced income deflation that the colonial state had been able to impose.

  And yet, interestingly, this did not get in the way of the postwar boom for a long time. Indeed, Arthur Lewis had predicted after the war that there would be a significant increase in raw material prices;12 and yet the actual price increase was restrained, and there was a resumption of the decline of the terms of trade of primary commodities vis-à-vis manufacturing.13 How can one explain this phenomenon, which induced a stability in the value of money in the metropolis, even after capitalism had forfeited its capacity to impose income deflation in the periphery because of political decolonization?

  Two things happened with decolonization. First, the postcolonial governments that had come everywhere to power on the strength of support from the peasantry and had been committed to improving the lot of the peasantry, introduced land-augmentation measures that, by and large, had been conspicuously absent during the colonial era. We saw that land augmentation required the support of the state. The colonial state had not given this support but had on the contrary squeezed the peasantry through taxes; the postcolonial state did provide this support. Public investment in irrigation increased; public expenditure on research and development into new seeds and new practices increased; public extension services were set up; and the government offered assured remunerative prices to agriculture even as it subsidized inputs for this sector. Because of these measures, there was a substantial increase in agricultural output even on the fixed tropical landmass, which raised domestic absorption of food grains while still making adequate supplies of primary commodities available to the metropolis.

  The second factor was the competition between the newly independent countries, each of which was keen on industrializing and hence for importing capital goods for this purpose from the metropolis, by increasing as much as possible their traditional exports. This kept down primary commodity prices for the metropolis, which obtained these commodities in adequate quantities because of the land-augmenting measures being adopted. Thus, India and Sri Lanka competed in the tea market instead of colluding, and India and Bangladesh (then a part of Pakistan) competed in the market for jute, and so on. The effects of decolonization on the availability of raw materials for the metropolis did not manifest themselves for a long time.

  But they eventually did, in the early 1970s, when there was a sharp rise in raw material prices. To be sure, there was a speculative element behind this rise. The snapping of the gold-dollar link, which had been a characteristic of the Bretton Woods system, and the subsequent abandonment of the Bretton Woods system itself, deprived the capitalist world of the stable medium of holding wealth that the U.S. dollar had provided under the Bretton Woods system.14 In the turmoil that immediately followed (until the dollar reestablished its status as the stable medium despite the absence of any explicit gold link), many wealth-holders moved to holding commodities (or rather, claims on commodities), which pushed up commodity prices. But obviously, speculation acted on top of a situation where supply constraints were beginning to manifest themselves.

  We can put the matter in exactly the opposite manner. The convertibility of the U.S. dollar to gold at $35 per ounce of gold, as decreed by the Bretton Woods system, became impossible to sustain and had to give way, owing to the desire on the part of, above all, the French government under de Gaulle, to insist on gold payments. This, however, was a result not of bloody-mindedness, as commonly supposed, but because of the inflation that had already made its appearance since the late 1960s. In other words, the Bretton Woods system collapsed because of the emergence of inflation. Though its collapse led, in turn, to an upsurge of inflation, the emergence of inflation can be attributed to the absence of any arrangement underlying the postwar boom for imposing income deflation on the working people of the periphery.15

  The sudden eruption of a commodity price explosion happened in the context of another phenomenon that was occurring during the so-called Golden Age of capitalism, and this was an enormous concentration of finance in the hands of banks and other financial institutions. There were three sources of such concentration: the first was the persistent U.S. current account deficits that began sometime after the war because of the massive expenditure under
taken by the United States in maintaining a string of military bases across the globe, which ballooned with the Vietnam War (which stoked the inflation that caused the wage explosion of 1968); the second was the savings of the economy during the prolonged boom that were deposited into the banking system; and the third was the first oil shock of 1973, to be followed by another one soon afterward, which suddenly transferred purchasing power from a vast number of oil consumers into the pockets of a few oil producers, who in turn deposited them with metropolitan banks.

  Metropolitan banks, therefore, started sitting on vast amounts of finance, which they wanted to lend out. For this, however, it was essential that barriers to capital flows (capital controls), especially financial flows across national boundaries, which had characterized the Bretton Woods system, should be lifted. This happened in Europe in the early 1970s, in Africa and Latin America a decade later, and in India in the 1990s. We thus had the formation of a globalized finance capital.

  The combination of vast concentrations of finance, on the one hand, with inflation, on the other, both produced under the aegis of the “Golden Age” regime, was an explosive one. The need to control inflation was particularly acute because of the vast accumulations of finance. And interestingly, the very globalization of finance that came about under the pressure exerted by finance capital to sweep away barriers to capital flows also entailed the reimposition of a regime of income deflation on the working people of the periphery that would control inflation and stabilize the value of money. This was the regime of globalization.

  The Regime of Globalization

  Central to the regime of globalization is globalization of capital, and above all, of finance. When finance is globalized while the state remains a nationstate, then the state, willy-nilly, has to act in accordance with the demands of finance; otherwise a financial outflow could cause acute crisis for the economy. Preventing such a capital flight, retaining what is called “investors’ confidence,” and, for that reason, getting approval from the credit-rating agencies that influence financiers’ decisions, becomes the main preoccupations of the state, which essentially means an undermining of the autonomy of the state.

  This has major implications for democracy. Democracy requires that alternative visions of society, alternative trajectories of development, should be placed before the people, from which they can choose. But if all political parties have the same policies, namely those approved by finance capital, because as long as they remain trapped within a regime of globalization they cannot do otherwise, then the choice of the people becomes meaningless. No matter whom they elect, the same economic policies will continue to be followed, unless some political formation has the courage to delink from globalization through capital controls. However, few have this courage, because of the transitional difficulties that such delinking would bring in its wake.16

  This issue of democracy is not one we will follow any further. More pertinent from our point of view is that under such a regime of globalization state intervention in demand management becomes impossible. For instance, boosting aggregate demand on the part of the state requires either running a fiscal deficit or taxing capitalists to finance state spending, given that the capitalists have a higher propensity to save than the workers. Taxing workers, who have a lower propensity to save, and spending the proceeds of such taxation, would not add much to aggregate demand through a balanced budget multiplier.

  But finance capital is averse to fiscal deficits for financing larger state expenditure that would boost aggregate demand. It provides all sorts of theoretical justifications for its aversion, all of which are completely invalid. Joan Robinson has called such justifications the “humbug of finance.”17 The real reason for this aversion, however, lies elsewhere, namely in that if the state has to boost demand through its own direct expenditure, then this undermines the social legitimacy of capital, and especially of that segment of capital, specifically finance, which consists of what Keynes had called “functionless investors.” Accepting the need for state expenditure for boosting aggregate demand, even when such expenditure is financed by a fiscal deficit, is tantamount to finance accepting its own superfluity, which, of course, it is unwilling to do. And taxing capitalists to enable the state to undertake expenditure that boosts aggregate demand is doubly disagreeable for finance. It not only undermines the social legitimacy of capital, especially finance, but also reduces capitalists’ income below what even a fiscal-deficit-financed expenditure of a similar order would have generated.

  Keynes, writing in The Yale Review, had said: “let finance be primarily national.”18 He was clearly aware that if a nation-state is faced with finance that is international, then it loses its autonomy, including in the matter of intervening to boost aggregate demand and employment. If capitalism had to be saved, he believed, then the levels of unemployment with which it was typically associated had to be reduced through state intervention, but this was not possible unless finance was “national.” The contemporary globalization of finance thus undermines the capacity of the state to intervene for boosting aggregate demand and employment.

  But globalization of capital does more than that. Since “investors’ confidence” becomes an obsession with the state, for which the demands of finance capital have to be acceded to, there is a change in the nature of the state. Instead of being an entity standing above society and apparently looking after the interests of all (despite being a bourgeois state in the sense of ultimately protecting and nurturing the interests of the capitalists through such apparent benevolence toward all), the state now becomes much more exclusively and transparently concerned with promoting the interests of globalized capital, including its domestic component. This means a withdrawal from defending the interests of the peasants, other petty producers, and workers.

  Unlike the postcolonial dirigiste regime in most countries of the periphery, which, even when they were developing capitalism within their shores, were nonetheless protecting and promoting peasant agriculture, the regime under globalization withdraws from supporting and promoting peasant agriculture and other petty production. It leaves peasants at the mercy of big capital (agribusiness); and its pursuit of “fiscal rectitude,” by curtailing the fiscal deficit, usually through a self-denying “fiscal responsibility” legislation that puts a statutory ceiling on it as a proportion of the GDP, entails a rolling back of the support measures for peasants and petty producers that had been introduced in the aftermath of political decolonization.

  All this means a loss of income in the periphery for the peasants, petty producers, and workers, who are adversely affected by the growing labor reserves, caused in the main by displaced peasants and petty producers looking for nonexistent jobs elsewhere. The regime of globalization therefore entails the imposition of an income deflation on the working population in the periphery.

  What is more, the state in the periphery under neoliberalism (the regime of fiscal austerity, privatization of public services, and the like) mimics to an extent the colonial state, although the element of “drain of surplus” no longer exists as it did before. If metropolitan capital acted in the colonial period through the metropolitan/colonial state for imposing income deflation, globalized capital today, with which the domestic big capital of the periphery is integrated, acts through the neoliberal domestic state to impose similar income deflation. Any tendency for inflation to surface beyond the “threshold” rate immediately calls forth “austerity” and tight money measures whose effect is to counter inflation through imposing an income deflation upon the working population. In other words, globalization entails not only income deflation in the periphery, but also the setting up of a regime for regulating income deflation in the periphery for protecting the value of money.

  The role of income deflation in bringing an end to the inflation in primary commodity prices in the early 1970s is often not appreciated. Even Paul Krugman is of the view that the inflationary upsurge of that time had been controlled through new sources of
raw materials and new lands coming under cultivation.19 As a matter of fact, there is no evidence of any output expansion in per capita terms, which, if Krugman was right, should have occurred.

  On the contrary, if we compare the average annual world per capita cereal output for the triennium 1979–81 with the corresponding figure for the triennium 1999–2001, then we find that this figure declined from 355 to 343 kilograms.20 In other words, cereal output expansion in excess of world population growth did not occur, which means that, since world per capita real income was growing over this period and since the income elasticity of demand for cereals is positive, there should have been a rise in cereal prices relative to the vector of money wages, and a shift in the terms of trade between manufacturing and cereals in favor of the latter (as manufacturing prices are likely to be tied to and move with money wages and even fall relative to money wages because of labor productivity growth). But over this period, we actually find a decline in the terms of trade for cereals vis-à-vis manufacturing in the world economy of the order of 45 percent!21 Clearly, it was income deflation, rather than any output expansion caused by new lands coming into cultivation, that was the reason behind inflation control in the 1970s.

  But just as the postwar dirigiste regimes had a lacuna, so does the regime of globalization, or more appropriately the neoliberal regime that globalization entails, and this lacuna is the mirror image of the lacuna of the earlier regime. The earlier regime, it may be recalled, had a mechanism for providing markets for the system through state expenditure, but no mechanism for imposing income deflation upon the working population of the periphery. The neoliberal regime under globalization has a mechanism for imposing income deflation upon the working population of the periphery, but no mechanism for providing markets for the system. And it is this lacuna that underlies the current conjuncture in world capitalism, characterized by a dead end for globalization.