Capital and Imperialism: Theory, History, and the Present

by Utsa Patnaik

  Let us now move to the opposite case where ex ante and ex post surplus are always equal, that is, let us assume a “non-crisis normal.” The demand for investment goods here increases as a result of the amount of surplus in the wage goods sector being 60 instead of 50. Since in the investment goods sector there has been no increase in labor productivity the share of surplus in that sector remains unchanged. There will thus be an increase in the investment sector’s output (to 120), wage bill (to 60), and surplus (to 60), which is assumed to be spent on investment because we are assuming a “non-crisis normal.” In the new situation, therefore, total surplus will be 120 (that is, 60+60), and total output 220 (that is, 100+120); the share of surplus in the total economy would have increased from 50 percent (100 out of an output of 200) to 54.5 percent (120 out of 220).

  It follows that no matter what adjustment occurs, an increase in the share of ex ante surplus in output manifests itself as an increase in the share of ex post surplus in output. Now, if the surplus accrues to, say, the top 10 percent of the population who own property in the form of capital stock, then the rise in the share of surplus would have manifested itself as a rise in the share of the top 10 percent in total income. Hence, an observed increase in income inequality between households can be explained by a rise in the ex ante share of surplus in output arising from a rise in labor productivity at given real wages, not necessarily across the board but in some originating sector.

  The fact that there has been such an increase in inequality of income distribution in most countries has been established by Thomas Piketty and several other researchers.5 Piketty’s own explanation for this phenomenon, however, is theoretically flawed. He explains the increase in income inequality through a neoclassical growth model in which an excess of the rate of profits over the natural rate of growth causes capital deepening during a traverse to the steady state. Capital deepening, in a situation of the elasticity of substitution between capital and labor being greater than unity, raises the share of profits in output which, according to him, underlies the growing income inequality. His explanation invokes two inequalities: r ˃ n, and ε ˃ 1, where r, n, and ε refer, respectively, to the rate of profit, the natural rate of growth, and the elasticity of substitution.

  But even within its own terms, r > n need not entail capital deepening, since, as Pasinetti had shown, in a steady state n = sc. r, where sc denotes capitalists’ propensity to save and is less than 1.6 And there is no reason why ε should be greater than 1. Besides, on this reasoning, the increase in income inequality should automatically come to an end when a steady state has been reached and this is so even assuming sc = 1.

  Above all, the neoclassical growth model assumes full employment at all times and thus Say’s Law, which, as we have seen, has no validity in a money-using economy. The full employment assumption on which Piketty’s explanation rests is not only empirically flawed but is logically untenable for a capitalist economy, which is preeminently money-using. Piketty’s valuable empirical results have to be theoretically explained in a manner different from his own.7 The explanation we have provided above in terms of a rise in the share of surplus within each country, because the country-wise vector of labor productivities has increased while the country-wise vector of real wages has not, under the regime of globalization, is meant to fill this gap.

  Ex Ante Tendency Toward Overproduction

  We have talked so far of a rise in the share of surplus within each country. One cannot logically infer from this that there would be a rise in the share of surplus in the world economy as a whole when there is a change in the distribution of world output across countries (which, after all, is ultimately the reason why the share of surplus in each country is rising). But a sufficient condition for the share of surplus in world output to rise when this share is rising within each country is that the post-relocation share of surplus in countries to which such relocation is occurring must be greater than or equal to the pre-relocation share of surplus in the countries from which such relocation is occurring. Since the share of surplus is rising everywhere, this condition is automatically satisfied if the post-relocation share of surplus in countries to which relocation occurs is higher than the post-relocation share of the surplus in countries from which relocation occurs.

  Now, there can be little doubt that the so-called newly emerging countries like India, China, and Brazil have larger shares of surplus in their output at present than the advanced capitalist countries had in the base period. Just to take an illustrative figure, the top 1 percent of the population in the United States had 11 percent of total income in the year 1978 compared to 13 percent for China and over 22 percent for India in 2014. It follows that the rise in the share of surplus within countries in the period of globalization, and on account of globalization, has also increased the overall share of surplus in world output.

  An increase in the share of surplus in world output has the effect of giving rise to ex ante overproduction for reasons discussed by Kalecki and that informed the argument advanced by Baran and Sweezy in the case of the United States in Monopoly Capital.8 The reason is that the proportion of income consumed by surplus earners is generally less than the proportion of income consumed by wage-earners in any period. So, any redistribution of income from wages to surplus in any period has the effect of reducing consumption in that period, and, for any given level of investment, the level of aggregate demand in that period. Since the actual investment in any period is determined by investment decisions taken in the past, its level can be assumed to be a given entity in the period in question. A shift from wages to surplus thus has the effect of reducing the level of aggregate demand in the period in question.

  But it is not just that a situation of ex ante overproduction develops in the period in question. Unless it is countered, it gives rise to a reduction in capacity utilization in the period and this affects the investment decisions taken in that period that will fructify as actual investment in subsequent period(s). Hence, investment in the next period falls relative to what it would have been, which then affects what happens in the period after the next one. It follows that even a once-and-for-all shift from wages to surplus that occurs in any period has the effect of lowering the profile of investment and output in all subsequent periods compared to what it otherwise would have been. If, to start with, the economy was experiencing steady growth, then the rise in the share of surplus will push it toward lower growth.

  The lowering of the profile of output occurs for two distinct reasons: one is the reduction in the value of the Keynesian multiplier because of the reduction in the economy’s “propensity to consume” owing to the shift from wages to surplus; the other is the lowering of the investment profile that occurs because investment is sensitive to the level of capacity utilization. (Kalecki had taken investment to be sensitive not to the level of capacity utilization but to the rate of profit, and since in the period when a shift occurs from wages to surplus there is no change in the rate of profit, as the actual investment remains unchanged, his argument was that the lowering of the output profile occurred because of a fall in the profile of consumption alone. Josef Steindl took investment to be sensitive to capacity utilization and adduced both the reasons for a lowering of the output profile.)

  If we are talking not of a once-and-for-all shift from wages to surplus but a shift that keeps occurring over time, that is, a series of shifts, which is what our argument has emphasized, then the economy moves toward lower and lower growth since labor productivity keeps increasing while real wages remain more or less constant.

  Any such tendency toward overproduction and stagnation arising from a shift from wages to surplus is an ex ante tendency, which need not actually manifest itself if there are some countervailing factors. Now, for a long period, right until the First World War, capitalism had two important characteristics: one was the segmentation of the world economy that enabled workers to obtain higher wages as labor productivity increased in the advanced capitalist w
orld, so that the tendency for a movement from wages to surplus was kept in check.

  To be sure, there was a shift, not from the wage-earners but from the raw material producers to the surplus earners. This is manifest, on the one hand, from the admittedly debatable statistical finding that the share of wages in national income in the advanced capitalist countries remained more or less constant in the last quarter of the nineteenth century and stretching right until the Second World War, and, on the other hand, from the secular decline in the terms of trade for primary commodities vis-à-vis manufacturing over the same period. This shift in distribution too could have created an ex ante tendency toward overproduction and hence stagnation; indeed, it has been argued that it did.9

  But here the second characteristic becomes relevant, namely the availability of the colonial and semi-colonial markets “on tap.” True, the provision of such a counter to this tendency required that newer and newer markets had to be accessed, through further and further encroachments into the economies of the colonies and semi-colonies. But there was no barrier to doing so, which is why the long boom of the long nineteenth century could be sustained despite a rise in what Kalecki calls the “degree of monopoly,” which should have increased the share of oligopoly profits in the total value of output, including raw material costs, and hence entailed an ex ante tendency toward overproduction and stagnation.

  In the post–Second World War period of dirigisme, there was again a counter to any tendency toward ex ante overproduction and stagnation in the advanced capitalist world that was provided by state intervention in demand management. The market provided by state spending was again a market “on tap” within this regime. Since the state was committed to maintaining high levels of employment, as large-scale unemployment would have undermined the social legitimacy of the system in the face of the socialist challenge, it actually set up a market on tap. Whether or not there was any such ex ante tendency toward overproduction and stagnation within the postwar dirigiste regime in the United States, as argued by Baran and Sweezy, is a matter of debate, as we have seen in chapter 15. But even if there was such a tendency, it remained only ex ante because of state intervention, which made the postwar boom, the so-called Golden Age of Capitalism, possible.

  What is true about the contemporary phase of neoliberal capitalism is that capitalism is subject both to an ex ante tendency toward overproduction and stagnation and a lack of any counter in the form of a market on tap to which it can turn for preventing this tendency from being realized. The two main counters, which were also the two main exogenous stimuli (on this more later), that served capitalism historically are no longer available to it. Encroachments into the pre-capitalist sphere that colonialism and semi-colonialism had permitted would no longer suffice for the purpose of countering the ex ante tendency toward overproduction and stagnation. And finance capital can now effectively prevent state intervention in demand management, which it had always opposed but had to accept perforce in the postwar context of a socialist threat. Hence encroachments into the pre-capitalist sector, though they occur, cannot solve the system’s problem, nor can state intervention, as is evident from the fact that in the midst of the post-2008 recession, the emphasis everywhere, after an initial period of dithering, has been on “austerity” and fiscal rectitude (until the current pandemic that has forced some relaxation).

  The Role of Bubbles

  The question must arise: If neoliberal capitalism entails a tendency toward stagnation and if the two basic counters that capitalism has historically had against any stagnationist tendency by way of having markets on tap are no longer available to it in this phase, then how do we explain that prior to the 2008 financial crisis, it experienced quite impressive growth rates? We should be clear that the growth rate of the advanced capitalist countries (OECD) in the period 1973–2008 was roughly half of the growth rate during say 1951 to 1973. In other words, there is scarcely any doubt that neoliberal capitalism has on average seen lower growth rates in the advanced capitalist countries, but this growth rate has not necessarily been slowing down, as our argument would suggest.

  The answer to this question, which many have given, is that two factors have replaced the role that the state had played through its demand management, after it ceased to play that role under pressure from globalized finance capital. One is burgeoning debt, which boosted workers’ (and not only workers’) consumption despite the stagnation in real wages, and the other is asset price bubbles.

  Debt alone can play only a transient role in boosting aggregate demand, since there would be a reluctance both on the part of borrowers to go on borrowing more and more relative to the size of their incomes and assets, and on the part of the lenders to go on lending more and more relative to the size of the assets and incomes of the borrowers. Asset price bubbles enter here: they increase both the borrowers’ and the lenders’ willingness to increase debt and hence boost consumption and aggregate demand. And to the extent that the bubble occurs in financial assets, it also reduces the cost of borrowing and thereby may have some stimulating role on investment as well. The artificial boost to the value of assets that is provided by an asset price bubble thus raises aggregate demand both through larger consumption and, possibly, larger investment.

  There can be little doubt that the growth process under neoliberal capitalism has been heavily dependent upon the formation of asset price bubbles, especially in the United States, which has boosted demand in that country and hence for world capitalism as a whole. The growth phase of the 1990s was related to the “dot-com bubble” in the United States, while the growth phase of the current century prior to 2008 was linked to the housing bubble in the same country.

  It is ironic that in the aftermath of the collapse of the housing bubble there has been much criticism of the U.S. Federal Reserve for its “irresponsibility” in promoting and sustaining the bubble. Alan Greenspan’s lowering of interest rates after the collapse of the dot-com bubble to generate the housing bubble has come in for particularly severe criticism. What is missed in this criticism is that in the absence of the housing bubble, there would have been no boom in the wake of the post-dot-com slowdown.

  Bubbles, in other words, constitute the very mechanism through which growth is generated under neoliberal capitalism, even though each bubble inevitably collapses, bringing a crisis in its wake. To criticize a Greenspan for promoting a bubble is thus to blame an individual for the flaws of the system, and indeed to subscribe to the pious belief that even in the absence of the bubble the system would exhibit respectable growth. When “subprime lending” is castigated, the point missed is that in the absence of the lending that appears in retrospect as “subprime,” there would have been no economic boom in the system.

  If the economy is to avoid sliding into stagnation, it becomes necessary to prolong the boom by lowering the interest rate, whose modus operandi in a neoliberal capitalist economy is through promoting the formation of a new bubble (though this may not in fact occur). The logic of the system requires that for growth to happen “subprime lending” must not appear as subprime. If it does appear subprime and is therefore curtailed, then growth gets eliminated.

  The question would arise: If bubbles can play the role under neoliberal capitalism of being a stimulus for growth, which was played by the colonial arrangement before the First World War and by state intervention after the Second World War, then why do we see neoliberalism as being specially afflicted by a problem in this regard? The answer is that bubbles as a stimulus differ from the previous stimuli in two crucial ways.

  First, they are not an exogenous stimulus like making inroads into precapitalist markets under the colonial arrangement or getting the state to intervene in demand management. An exogenous stimulus implies that in addition to the multiplier-accelerator mechanism, or the occurrence of investment in expectation of growth in the market because growth has been occurring in the past, there is an additional amount of investment that occurs in every period stimul
ated by this exogenous element. Colonial markets and state intervention are exogenous in this sense; bubbles are not. They may get formed or they may not get formed; there is no investment that occurs in every period because of a bubble, since such a bubble may not exist at all. The positive trend to the system that colonialism or state intervention provide because they give a floor to investment even in the event of a collapse of the boom, is not provided by a bubble.

  Second, state intervention and colonial markets were not just exogenous in the sense that they provided a positive trend to the system; they provided markets on tap, which prevented the boom from collapsing. They did not just provide a floor in the event of the boom collapsing; they actually prevented the boom from collapsing since they plugged any deficiency in aggregate demand that might cause the boom to collapse. Bubbles obviously are not such markets on tap.

  Neoliberal capitalism differs from all previous phases of capitalism, other than the interwar years of Depression. In a fundamental respect it lacks a prop of the sort that these previous phases, which were characterized by long booms, had a prop that is both an exogenous stimulus and a market on tap. It is, therefore, inherently prone to stagnation as capitalism had been in the interwar period, similarly lacking a prop. And this proneness to stagnation is greatly magnified by the shift from wages to surplus that it causes in the world economy.