THE budget season is upon us, and soon there will be pundits appearing on television channels to tell the government what it should do. And the typical advice will be: restrict or wind up the “populist” schemes of the UPA; use the funds generated by such restrictions to provide “incentives” to capitalists to stimulate growth, so that the Indian economy, which has been woefully stagnant of late, experiences a revival. The moral of their story in short would be: an income redistribution from the poor to the rich is good for growth. Is it in fact the case? WRONG ARGUMENT The argument for this position runs as follows. If the government takes away a rupee from the poor, then their consumption drops by say one rupee; if this rupee is given to the capitalists (or generally to the rich, through whom it indirectly gets into the hands of the capitalists), then they spend it on “investment”, i.e., adding to the capital stock they have, and hence to the capital stock of the country. Therefore a rupee transferred from the poor to the rich leads to a shift from consumption to investment (a fact that is unaltered even if the rich also consume a part of the rupee and contribute only the remaining part towards investment). Since the growth of an economy depends upon investment, such a shift from consumption to investment would increase the growth of the economy, so that in the long run even the poor will be better off with such a regressive income redistribution than they would have been in its absence. This argument however is completely wrong. It presumes that whatever is not consumed is automatically invested. Economists use the terms “savings” to denote the difference between income and consumption (the term incidentally means only this and nothing more). The above argument, putting it differently, is based therefore on the assumption that all “savings” are automatically invested, which is an absurd proposition, sometimes referred to as “Say’s Law” after the French economist Jean Baptiste Say (ridiculed by Marx as the “trite” Monsieur Say) who had originally advanced it. Its absurdity is evident from the fact that if Say’s Law were valid, then there never could be any “over-production” crises under capitalism! Let us see why. If Rs100 worth of goods and services are produced in an economy, then Rs100 worth of incomes are generated from such production; these incomes are partly consumed, and if the part not consumed (or “saved” according to economists’ language) is automatically invested, then all of the total income, i.e., the consumed part and the invested part taken together, generates demand for goods and services which must come to Rs100 in the aggregate. Aggregate demand therefore must always equal aggregate output, ruling out any possibility of “over-production”. The only problem that can arise in an economy, on this view, is that the composition of demand may not match the composition of output, i.e., there may be too many shirts produced relative to the demand for shirts and too few combs (say) relative to the demand for combs. But such mismatches get sorted out over time through the movement of capital and labour from one sphere to the other, in this example from shirt production to comb production; they do not cause slumps for the economy as a whole, which are crises of aggregate over-production when more of all goods is produced relative to demand. Such crises of over-production which characterise capitalism arise because all “savings” are not automatically invested. On the contrary the decision on how much to invest is taken by looking into the future: what stream of returns a plant is going to give over its life-time, whether this stream of returns, when compared to the cost of installing the plant, gives a rate of return that is high enough relative to the interest rate on loans, and so on. If the future looks bleak to capitalists, then less is invested, while if the future looks bright then more is invested. In the above example, if, when Rs100 worth of goods are produced and hence Rs100 worth of income is generated, only Rs 65 is spent on consumption, and, because of expectations of a bleak future, only Rs 15 worth of investment is undertaken, then the total aggregate demand (consumption plus investment) comes to only Rs 80. In such a case Rs 100 worth of goods cannot be produced; if perchance they are, then unsold stocks will build up, because of which the capitalist producers will cut back on output, and unemployment will soar. We would be in the midst of a crisis of over-production. There are two further points to be noted here. First, while capitalists’ expectations about the future, upon which investment depends, are shaped by many factors, an important one among these is current experience. If existing plant is not sufficiently utilised owing to lack of orders, then capitalists do not naturally feel inclined to add to their capacity; they therefore curtail investment. The opposite happens when existing capacity is almost fully used up. So, the current experience with regard to demand, relative to the productive capacity of plants and equipment, is an important factor underlying investment decisions. Secondly, investment decisions take time to fructify, so that what is actually spent on investment projects today, say on the Kochi metro, is already decided earlier. Current experience with regard to capacity utilisation therefore affects not so much current investment spending but current decisions regarding future investment spending. Now, keeping all these factors in mind, let us see what happens when there is an income redistribution from the poor to the rich. If a rupee is transferred from the poor to the rich, the consumption expenditure by the poor falls almost by a rupee; but that of the rich does not rise by as much, since the consumption-income ratio of the rich is invariably lower than of the poor. So every such regressive income redistribution lowers aggregate consumption. On the other hand investment expenditure in any period is largely determined by past decisions and does not change much immediately. Hence, since consumption expenditure falls and investment expenditure does not change much, aggregate demand (which is the sum of the two) falls; output is curtailed and unemployment increases. A crisis of over production is unleashed. But when this happens, unutilised capacity increases, so that decisions regarding investment in the future are curtailed rather than getting boosted, as was the supposed original intention behind the regressive income redistribution. In short, a regressive income redistribution, brought about ostensibly for increasing investment at the expense of consumption ends up lowering both, and hence causing a crisis of over-production. This is so simple and obvious a proposition that no amount of sophistry or mathematical sleight-of-hand can possibly “disprove” it. But then the question arises: can a shift in income distribution in favour of the rich ever have a positive influence on investment decisions? It can, but only under the following circumstances. While the regressive shift in income distribution will necessarily cause a shrinking of aggregate demand, for reasons already discussed, in the period in question, it may enthuse speculators into having euphoric expectations about the future, which may start a new asset price “bubble”. When there is such a “bubble” in asset prices, those holding such assets become wealthier at that moment. This may make them spend more on consumption, such as taking more expensive holidays, buying yachts etc., and hence have some positive effect on investment. And if the asset is a reproducible asset, like a house, then a “bubble” in the price of the asset which carries this price far beyond its cost of production (or more accurately cost of construction), will lead to greater construction of houses, i.e., more investment. Likewise a “bubble” in financial asset prices would make raising finance cheaper and hence may stimulate larger investment expenditure in future. In short, there may be a positive effect of a regressive income redistribution on investment via the creation of “bubbles”. (A “bubble” will also have a positive effect on consumption as we have seen, but on the whole consumption is likely to shrink owing to such regressive income redistribution). But this fact alone is not enough to ensure that the investment stream in the periods to come actually increases. The positive “bubble” effect, in stimulating investment, must be larger than the negative “capacity utilisation” effect, in reducing investment, if the stream of investment in the periods to come is to be larger than it would have been in the absence of the regressive income redistribution. But if it is not, and if the negative effect predominates, then it will also gather momentum, so that its predominance will become more and more pronounced over time. POOR TO SUFFER THE MOST With this, let us now turn to the Indian example. In India, there is already a stock market boom that has been underway for quite some time. The stagnation of the economy, especially of the manufacturing sector, has occurred even in the midst of the stock market boom. What is more, the decline in capital goods sector’s output in 2013-14 compared to the previous year suggests that investment, especially corporate investment (precisely the element that should have got a boost from the stock market boom), has been curtailed despite this boom. Hence the “bubble” effect that is supposed to act in a positive direction on the future stream of investment expenditures, does not seem to be having much of an impact. In this situation if there is a regressive income redistribution away from the poor, then the negative “capacity utilisation effect” is almost certain to dominate, causing a lowering not only of current consumption and of the profile of future consumption, but also of the profile of future investment as well. Hence taking the economy as a whole, such regressive income redistribution will not overcome the stagnation we have been experiencing. To be sure, the few corporate magnates towards whom such regressive income redistribution would occur, would benefit from it, but the economy as a whole would not; on the contrary, the stagnation of the economy, whose overcoming would be cited as the reason for such redistribution, would get aggravated. Any such regressive income redistribution is repugnant because of the squeeze it imposes on the poor. But even the argument used to justify it, namely that it would overcome stagnation, lacks validity; indeed the opposite would happen. Far from being beneficiaries of such redistribution in the long run, the poor, who would be its immediate victims, would suffer both now and also, to an even greater extent, in the future.