An Enduring Myth About Capitalism
Prabhat Patnaik
THERE are of course many myths about capitalism spun by economists. One of these myths spun by David Ricardo has endured for over two centuries. Ricardo had originally been an enthusiastic supporter of the introduction of machinery, dismissive of the argument by workers’ organisations of his time that it gave rise to unemployment. In the third edition of his Principles however he added a chapter titled “On Machinery” in which he agreed with the workers’ organisations that the introduction of machinery did indeed cause unemployment immediately, but then went on to argue that since it raised the rate of profit, and hence the rate of accumulation and growth, including the rate of growth of employment, it would over time generate even larger employment than would have occurred otherwise.
This assertion of Ricardo, which Marx had trenchantly criticised in his Theories of Surplus Value, is obviously flawed for several reasons. First, Ricardo’s whole discussion was around a one-shot introduction of machinery; but in a capitalist economy technological change is a continuous affair, the introduction of one set of machinery being followed by the introduction of another, and yet another. It follows therefore that, even assuming that the rate of profit and hence the rate of accumulation and of employment growth keeps rising through such technological progress, the day when the unemployment generated by such mechanisation will eventually get fully absorbed, also keeps getting further and further postponed.
Secondly, the entire Ricardian argument assumes that Say’s Law holds; that is, there is never any problem of aggregate demand. In other words, all savings which are equal to the unconsumed profits (all wages are assumed to be consumed) are invested; investment is never supposed to be constrained by the growth of the market, which in turn presupposes that there is no other form in which wealth can be held, that is, money is not a form in which wealth can ever be held. This is both unrealistic and logically invalid.
Once we recognise that investment is governed by the growth of the market, then it follows that a shift from wages to profits caused by the introduction of machinery will reduce the rate of accumulation. Since the introduction of machinery will immediately cause a rise in unemployment, wages will not rise even as labour productivity rises through mechanisation; this will cause a shift from wages to profits. Since wages are more or less fully consumed while only a small proportion of profits is, such a shift from wages to profits tends to reduce the ratio of consumption in total income, causing a tendency towards over-production, which actually brings down the rate of accumulation.
Hence, far from increasing the rate of employment growth, as Ricardo had argued, the introduction of machinery will tend to bring down the rate of employment growth. Of course, there may be periods when the rate of accumulation may increase for independent reasons and if such periods are marked by no further introductions of still newer machinery, then the level of unemployment may indeed come down; but such reductions in unemployment are not caused per se by the initial introduction of machinery. We can therefore say with certainty that there is absolutely no reason to believe that the introduction of machinery will, even over a period of time, overcome on its own the unemployment it initially creates.
The picture painted by Ricardo however has come to be accepted as a general hallmark of capitalism, that no matter what hardships it may cause in the beginning, it eventually brings greater prosperity to all. This however is just not true: the hardships it causes initially, we have seen, will on its own never tend to get ameliorated over time; there is absolutely nothing in the internal dynamics of capitalism that would contribute to an overcoming of these initial hardships.
The question then arises: how do we explain the fact that in the region of the world where capitalism originated and which continues to be its home base, namely Western Europe, there has been an actual improvement in the living conditions of the people compared to the initial years of capitalism? How do we reconcile this observed phenomenon with the theoretical argument that the initial hardships caused by capitalism, far from being reversed, have a tendency to get aggravated over time on their own?
There were two historical circumstances associated with the development of capitalism that explain this puzzle. The first is the massive emigration of population from Europe to the temperate regions of the world like Canada, the United States (as it later became), Australia, New Zealand and South Africa. These became the “colonies of settlement” as distinct from the “colonies of conquest” such as India, Indonesia or Indo-China. In the colonies of settlement the immigrants took over the land belonging to the original inhabitants and earned a higher level of income by cultivating it which raised the “reservation wage” of workers back home in Europe, that is, the minimum wage obtainable by workers. Thus both the level of employment and the wage-rate got raised in their home countries, well above what it otherwise would have been, and thereby negated the adverse employment effect of mechanisation.
The scale of emigration from Europe was massive relative to its population. Over the “long nineteenth century” (stretching up to the First World War) it has been estimated that fifty million persons emigrated from Europe to the temperate regions of European settlement. For Britain, the original site of the Industrial Revolution, where machines made their first appearance, the scale of migration every year was so large that about half the natural increase in population left its shores. Emigration on such a scale sustained over such a long period introduced a tightness in the labour market by sending the unemployed abroad. It is this external expansion factor, rather than any internal dynamics of capitalism, that ensured that the initial unemployment created by the introduction of machinery, far from getting aggravated over time, actually got alleviated.
The second factor that worked in the same direction was the phenomenon of de-industrialising exports of manufactures to the colonies of conquest that already produced these manufactures. Thereby the unemployment generated by the introduction of machinery was not confined to the domestic economy alone; a large part of it occurred outside in these colonies of conquest. Lingering on in these countries, it comprises the vast labour reserves of the global south to this day.
It is because we do not generally see these reserves as arising from the mechanisation introduced by industrial capitalism in the metropolis, and focus only on the unemployment generated within the metropolis itself while assessing the effect of mechanisation, which actually got reduced through emigration, that we get the impression that such unemployment disappears over time through the internal dynamics of capitalism. There is in fact no such effect of the internal dynamics of capitalism.
All this has extremely important implications for the global south today. It is accepted as gospel truth, and sold as such by the World Bank, the IMF and other such agencies, that the pursuit of unbridled capitalism by countries of the global south would overcome their unemployment and poverty. The example of Western Europe is given in support of this claim. This however is a total misreading of both the theory and the history of capitalism.
The early Indian planners like P C Mahalanobis, were well aware of this fact. Not only did they want a dirigiste regime rather than an unbridled capitalist one for the development of the nation, but even within the dirigiste regime, they wanted protection for cottage and small-scale industries. Mahalanobis, apart from his well-known emphasis on heavy industry, had an additional element to his proposal for India’s second five year plan. This was to bolster the availability of consumer goods, even while creating employment in the economy, through an expansion of cottage and small-scale industries. Very similar ideas of “walking on two legs” were being developed around the same time in China, the other major populous country of the global south, for overcoming its problem of unemployment and poverty inherited from colonial and semi-colonial times.
It is a pity that economic discussion in the country has reached such a jejune level today that two hundred year-old myths about capitalism are being recycled, and sustained through all sorts of false claims about the disappearance of poverty within the global south. The sooner we abandon such myths the better.
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