August 03, 2014

The Resurrection of Orthodoxy

Prabhat Patnaik

THE social importance of the capitalist class arises from the fact that the level of activity and employment in a capitalist economy depends upon the “state of confidence” of the capitalists (or what Keynes had called their “animal spirits”). Marx had theorised that the capitalists, competing against one another (a competition or “rivalry” that does not disappear even when they collude), are caught in a Darwinian struggle where they are compelled to accumulate. So, their desire to accumulate out of surplus value, rather than simply consuming it, is forced upon them, and does not depend upon any “state of confidence”; but accumulation can take diverse forms, including the form of money capital. If they desire to accumulate in the form of money capital, then no demand for goods and services is created by what they seek to accumulate, which means that the produced surplus value does not get “realised”; and because of this it does not even get produced (since capitalists cut back on production when unsold stocks accumulate). The level of activity and employment falls. Suppose for instance that when capital stock is fully used, Rs 100 worth of goods and services are produced. This would generate incomes worth Rs 100, divided between wages and profits in the ratio, say, of 60:40. If workers habitually consume all their wages, and capitalists in the current period decide to consume Rs 10 no matter what their income, then this entire output of Rs 100 will be demanded (at the base price) only if investment (i.e., additions to fixed capital and inventories) amounts to Rs 30. But if the capitalists do not wish to add Rs 30 to their capital stock but only Rs 10 and wish instead to hold the remaining 20 of the surplus value in the form of money, then the total demand in the economy will be Rs 80 (= 60+10+10) when total output is 100. There will then be over-production, with Rs 20 worth of goods remaining unsold. If output is cut back to get rid unsold stocks, then the output will finally settle not at 80 (for the wage bill was 60 only when output was 100, it will fall if output falls), but at a lower figure, namely 50. This is because capitalists’ consumption and investment being 20 (=10+10), only 20 of surplus value can be realised, and hence produced; and this much surplus value is contained in only Rs 50 of output. There will therefore be 50 percent less of output and employment compared to the “full capacity” level. (The relationship whereby a shortfall in investment by 20 (10 instead of 30) causes a lowering of output by 50 (50 instead of 100) is referred to as the “multiplier”). Now, whether the capitalists wish to hold 10 or 20 or 30 in the form of addition to capital stock depends upon their “state of confidence”. It is in this sense that the level of activity and employment in a capitalist economy depends upon the “state of confidence” of the capitalists, “confidence” about whether they will be able to sell, at the desired rate of profit, the goods that will be produced from the additional capital stock. As Michal Kalecki, the renowned Polish Marxist economist, had put it, “under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence” (of the capitalists - PP). State expenditure however can increase demand. In the above example, if out of the total produced surplus value of 40 at full capacity output, capitalists wish to consume and invest only 20, then the State can spend 20 to make up for the deficiency of aggregate demand, in which case 100 output will be produced (since it will be demanded). When 100 is produced surplus value will be 40; so, the State can either borrow 20 from the capitalists (what they themselves do not spend out of the surplus value) or it may tax away 20. In the former case, there will be a fiscal deficit of 20; in the latter case a balanced budget. But even when there is a balanced budget, the capitalists do not lose in terms of income: in the absence of State intervention, the profits accruing to the capitalists in the above example would have been 20 (spent on their consumption and investment); and with State intervention with a balanced budget, the (post-tax) profits accruing to capitalists is still 20. State intervention therefore can increase employment and activity in the economy without reducing capitalists’ profits. But then why are the capitalists so opposed to State intervention in “demand management”? CLASS INSTINCT This is because of one major difference it causes. And the difference is that the “state of confidence” of the capitalists ceases to matter, which also means that their social significance diminishes. If employment and output depend upon the “state of confidence” of the capitalists, then the State has to do everything to boost this “state of confidence”; and even the workers can be terrorised into quiescence on the grounds that their militancy may sap the “state of confidence” of the capitalists reducing employment and therefore affecting them adversely. But if, no matter what the “state of confidence” of the capitalists, the State can always intervene through its expenditure to boost the level of aggregate demand, then the workers do not have to worry about their militancy undermining the “state of confidence” of the capitalists, and can wage firmer struggles for improving their wages and working conditions. And since State expenditure can always take the form of investment, even the composition of demand need not shift away from investment expenditure, i.e., spending to augment capital stock, in which case even the growth rate of the economy, as opposed to the output and employment in a particular period, also ceases to depend upon the capitalists’ “state of confidence”. It is to prevent the erosion of their social significance that capitalists are so vehemently opposed to State intervention in demand management, and insist on “sound finance”, i.e., on the State balancing its budget (without, needless to say, increasing taxes upon them). In the above example if the State ran a fiscal deficit then the capitalists’ profit instead of being 20 (which it would be in the absence of State intervention) would become 40 (with the 20 in excess of their consumption and investment being borrowed by the State to finance the fiscal deficit). They would therefore become better off with a fiscal deficit than with “sound finance”; and yet they are invariably opposed to a fiscal deficit. And this is because their class instinct tells them any undermining of their social position is disastrous for them in the long run. If society does not have to bend itself backwards to improve their “state of confidence”, if the State can do the job of increasing employment and output without caring about their “state of confidence”, then who knows: the people may start demanding tomorrow that the State run enterprises without leaving them for the capitalists’. They may in short, start demanding that, through social ownership of the means of production, the State should simply get rid of a class whose continuance as owners of the means of production seems altogether unnecessary. As Kalecki again put it: “The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the ‘state of confidence’.” In the immediate aftermath of the 2008 crisis when the capitalists had pushed society into a state of mass unemployment reminiscent of the Great Depression of the 1930s, and when the financial system of world capitalism appeared to be on the verge of collapse, the “doctrine of sound finance” (which these days means not exactly balancing the budget, but having a fiscal deficit that does not exceed a certain percentage, usually three percent, of the GDP), was momentarily abandoned. People’s anger against capitalism flared up and to stem this anger, States undertook “fiscal stimulus packages”. These packages were tiny compared to the amounts the States pledged for bailing out the banks that were hit by the crisis: for instance in the US while $13 trillion was promised by the Obama administration to help the financial system, the fiscal stimulus package was altogether only $700 billion; but even this marked a change away from the orthodoxy of “sound finance”. What is more, these fiscal stimulus packages also devoted some amounts towards “social protection measures”, i.e., providing relief to the people in the context of the crisis. During 2008-09 there were at least 48 “high” and “middle’ income countries that provided fiscal stimulus packages totaling $2.4 trillion, and roughly a quarter of this sum was devoted to “social protection” measures. This fact did play a role in insulating the people against the worst effects of the crisis. CLOCK TURNED BACK From 2010 onwards however the clock has been turned back and the orthodoxy of “sound finance” has been resurrected. There is nothing mysterious about why this has happened. Breaking with the doctrine of “sound finance” entails breaking with the hegemony of international finance capital. This means at the very least breaking from the process of globalisation of capital by imposing capital controls. In other words, one cannot just have a piecemeal retreat from financial orthodoxy; one has to follow it up with a host of other measures which would mean a shift away from the regime of globalisation. Since the advanced capitalist States were unwilling to do this, international finance capital reasserted its clout which it had temporarily lost during 2008-09. Governments started reversing course and embarked on “fiscal consolidation”, which meant not just cutting back State expenditure which had increased in the wake of the crisis, but something more. Since government revenues had fallen owing to the crisis, re-imposing the fiscal deficit targets meant drastic cuts in government expenditure. “Fiscal consolidation” became a euphemism for deep cuts in government expenditure. And the sector seriously affected was the social sector. As many as 122 governments are contracting public expenditure in 2014, of which 82 are developing countries. Even “high-income” countries are contracting their “social protection”, and in Europe this is supposed to have increased the level of poverty for 123 million people, or roughly 24 percent of the population. There are no doubt some countries moving in the opposite direction, such as China, Brazil and a few others in Latin America and Africa; but India, alas, is firmly committed to financial orthodoxy. The resurrection of the orthodoxy will not only lengthen the crisis of the world economy but will also ensure that those least able to cope with its consequences are made to suffer the most.