Exchange Rate Depreciation and Real Wages

By Prabhat Patnaik

Republished from People’s Democracy.

MOST people, including even trained economists, fail to appreciate the fact that an exchange rate depreciation, if it is to work in reducing the trade deficit in a capitalist economy, must necessarily hurt the working class by lowering the real wage rate. A capitalist economy, looking at it differently, improves its trade balance, for which it must improve its competitiveness, by lowering the real wage rate; and an exchange rate depreciation is one way of doing so.

Most textbooks in economics do not mention this fact. They are written from the point of view not only of bourgeois economics in general, but of a bourgeois economics that invokes a model of a capitalist economy that is far removed from reality. They see this economy as consisting of a set of markets in each of which a price-rise is supposed to lower excess demand. The foreign exchange market is one such; and the text books simply say that as long as the demand and supply curves have the right shape in this market (so that excess demand is lowered through a price-rise), an exchange rate depreciation, which is the same as a rise in the price of foreign exchange, lowers the excess demand for foreign exchange, namely lowers the trade deficit. This is where their analysis of an exchange rate depreciation usually ends; and then they move on to discussing under what conditions the curves have the right shape.

This entire mode of analysis however is flawed. Most economies need imported inputs, usually oil and natural gas; the oil-producing economies on the other hand need a range of non-oil raw materials which they cannot grow themselves but cannot do without. The imported inputs,together with labour and domestically-produced current inputs, constitute the list of current inputs. And in all capitalist economies, the prices of commodities are determined as a mark-up over the costs of current inputs per unit of output. This is of course true under monopoly capitalism. This is how oligopolists operate; they fix prices in this manner and let the level of demand at this price determine what is produced. Some argue that capitalism even in the earlier period was characterised by such price-fixing, and that the classical political economists’ conception of free competition (which Marx took over) where the producers accepted a price impersonally determined by the market, was not a realistic picture. But this discussion is not germane to the present issue; the basic point here is that in any modern economy, prices are fixed by oligopolists as a mark-up over the unit prime cost.

Now, suppose a currency depreciates by 10 per cent; then the local currency prices of all imported inputs go up by 10 per cent, and therefore the part of unit cost arising from imported inputs in the production of any final good goes up by 10 per cent. If real wages were to remain unchanged, then money wages will have to keep going up proportionately as prices rise; and in such a case prices will ultimately rise by 10 per cent in local currency, with money wages also rising by 10 per cent and hence unit labour cost too also rising by 10 per cent. (The unit prime cost arising from domestically-produced inputs rises in the same ratio as the final produced goods price and therefore will also rise, automatically, by 10 per cent). But if local currency prices rise by 10 per cent following an exchange rate depreciation of 10 per cent, then this means there has been no real effective depreciation whatsoever; and hence not an iota of difference will be made to the trade deficit.

If domestic prices rise by 10 per cent following an exchange rate depreciation of 10 per cent, then the prices of export goods in terms of foreign currency would remain unchanged; and hence there is no question of any increase in the quantity of exports owing to their becoming cheaper. Likewise, if domestic prices rise by 10 per cent following an exchange rate depreciation of 10 per cent, then the local currency price of imported goods would rise by 10 per cent, the same as domestically produced goods, in which case there is no question of any reduction in the quantity of imports. It follows therefore that with no increase in the quantity of exports and no decrease in the quantity of imports, the trade deficit measured in foreign currency remains unchanged.

An absolutely essential condition for an exchange rate depreciation to work therefore (and this is only a necessary condition with no guarantee that its fulfilment will actually improve the trade balance) is that domestic prices must not rise at the same rate as the price of foreign exchange owing to an exchange rate depreciation. And this can happen only if money wages do not rise by the same proportion as the final goods prices; that is, if there is a fall in the real wage rate.

This can be seen as follows. If, say, a 10 per cent exchange rate depreciation is to make any difference to the trade balance, then the domestic prices must rise by less than 10 per cent, say, by 7 per cent, for only then would there be some real effective depreciation. For this to happen, the unit prime cost must rise by 7 per cent, as the mark-up by the capitalists is a given ratio. Now, the unit prime cost has two relevant components: the unit labour cost and the unit imported-input cost (unit home-produced input cost rises in the same ratio as the final goods price and therefore need not be considered separately here). Therefore, for the unit prime cost to rise by 7 per cent, since the unit imported-input cost rises by 10 per cent, the unit labour input cost must rise by less than 7 per cent, say by 5 per cent. With given labour coefficients in production this can happen only if money wages rise by 5 per cent, when prices rise by 7 per cent; that is, when real wages fall.

Of course, there can be real effective exchange rate depreciation, with domestic prices rising by less than the 10 per cent rise in the price of foreign exchange, even with real wages remaining unchanged, if the profit margins of the capitalists could be lowered. But this is precisely what is not possible in a capitalist economy. This can happen in a socialist economy where the enterprises, mostly State-owned, can be directed to charge lower profit margins, so that a real effective exchange rate depreciation can be brought about with no fall in the real wage rate; but in a capitalist economy, the profit-margin is not amenable to any reduction. A real effective exchange rate depreciation therefore necessarily imposes a squeeze on the real wage.

But even assuming that the workers are not strong enough to resist such a reduction in their real wage rate, there is no reason to expect the trade balance to improve: if the trade balance is to improve then domestic employment and output will increase, but this would mean a reduction in output and employment in some other countries at whose expense this economy would be increasing its market-share. If those countries retaliate by depreciating their exchange rates in the same proportion, then there would be no change in market shares and no change in trade balances either.

When the competing countries depreciate their exchange rates in retaliation, the real wages go down in those countries as well. This mode of reducing trade deficit therefore, when no country is making any independent effort to raise the level of demand through income redistribution in favour of the workers or through larger government expenditure, simply results in each squeezing its workers to no avail.

The attempt to raise domestic employment at the expense of rivals, through an exchange rate depreciation (that is supposed to work through reducing the trade deficit) is called a “beggar-my-neighbour” policy. The pursuit of “beggar-my-neighbour” policies by several capitalist economies raises employment nowhere while reducing the real wage rate everywhere.

But that is not all. The reduction in real wages can, under certain circumstances, even lead to a reduction in employment everywhere because of the associated reduction in aggregate demand. It is a symptom of the irrationality of capitalism that a group of countries vying with one another to improve their positions by pursuing “beggar-my-neighbour” policies, may ultimately end up with each country becoming worse off than before.

It is a sign of the hopelessness induced by the current capitalist crisis, that, notwithstanding the experience of the 1930s, voices are audible in the US today which seek a revival of the US economy through a depreciation of the dollar.

Public Opinion and Imperialism

By Prabhat Patnaik

A New York Times News Service report reproduced in The Telegraph of Kolkata (May 7), discusses the findings of a global public opinion survey carried out by the Bennett Institute of Public Policy of Cambridge University. These show that the Ukraine conflict had shifted public sentiment “in developed democracies in East Asia and Europe as well as the United States of America, uniting their citizens against both Russia and China and shifting mass opinion in a more pro-American direction”; by contrast “outside this democratic bloc, the trends were very different”. For a decade before the Ukraine war, public opinion across a vast span of countries stretching from continental Eurasia to the north and west of Africa, had become more favourable to Russia even as western public opinion became more hostile; the Ukraine war apparently has made little difference to this fact. And the same is also true of public opinion vis-à-vis China.

While this divergence between people’s sympathies in the two parts of the world is striking, the explanation offered for it in the report is quite banal: it points to what it calls a “divergence in fundamental values”. It is not only the “oppressive” and “authoritarian regimes” of the developing world whose perceptions differ from those of the “democratic and liberal” advanced countries; even the peoples of the former appear to be unsympathetic to western powers, and this is because they have very different fundamental values. The people of the third world in other words are not with the west because they have values that do not appreciate the importance of democracy, civil liberties, secularism, and so on, which is why they support Russia and China.

The corollary drawn for US foreign policy is that it should woo, rather than shun, third world “illiberal” regimes like those in Turkey or India. The suggestion is that such regimes, while differing from western values, are generally in sync with the mood of third world peoples.

What this analysis ignores is that the US has never shunned such regimes anyway; besides, it is a calumny to suggest that the values of the people of the third world are in sync with such regimes. In fact, on the contrary, whenever they have elected regimes that work on their behalf, to further their interests, the US has worked directly or indirectly to topple such popularly-elected democratic regimes through promoting revolts or coup de etats. The examples of Guatemala (Arbenz), Iran (Mossadegh), Indonesia (Soekarno), Chile (Allende), Brazil (Goulart), Congo (Lumumba), Burkina Fasso (Sankara) are just a few that immediately come to mind; in addition it has directly or indirectly supported the assassination of popular leaders who were leading their peoples to national liberation, leaders such as Eduardo Mondlane, Amilcar Cabral, and others.

Such an analysis recommending even stronger US support for third world authoritarianisms, arises if one closes one’s eyes to the real reason behind third world people’s hostility to western powers, including on the Ukraine War; and this lies in their opposition, whether informed or instinctive, to western imperialism based on their lived experience. And third world governments, including even authoritarian ones allied to the US, are often forced to take cognisance of this fact, which is why they express sympathy for Russia in the Ukraine War.

On the other side, thanks inter alia to the barrage of propaganda to which they are subjected through the corporate-controlled media, of which the NYT piece under discussion is itself an example, public opinion in the west is manipulated into supporting imperialism.

This fact however is changing, as is clear from the spate of strikes that workers in the European Union, are currently engaged in, to protest against the erosion in their living standards through inflation, for which they blame the Ukraine War with good reason. The prolongation of this war, they realise, is entirely because of the actions of their own governments.

What is significant however is the large-scale betrayal of the people in the west by their political parties, barring a few exceptions, which have lined up behind the US. Their support for the US has gone to a point where even the revelation by Seymour Hersh that the US was responsible for blowing up the Nord Stream gas pipeline, in order to scuttle any possibility of Germany obtaining its gas from Russia even in the future, has caused not a flutter; it has been more or less blocked out by the media not only in the US but also in the European Union.

This complete ignoring of the interests of the people by political parties, including by parties that claim to speak on behalf of the working class and have traditionally enjoyed the support of the working class, is reminiscent of the eve of the First World War, when the leadership of the Second International in each belligerent country supported the war effort of “its own bourgeoisie”. When war credits were being voted in the German parliament in 1914, the mighty Social Democratic Party of Germany which had as many as 86 daily newspapers, voted in favour. The sole vote against was by Karl Liebknecht who had then gone on to found the German Communist Party before being martyred along with Rosa Luxemburg.

Today it is not just the Social Democrats, but even large swathes of the radical European Left, that stand behind the German government’s support for Ukraine against Russia. They put forward two arguments, one general and one specific. The general argument states that, far from the war being an outcome of western imperialism, the west is backing Ukraine in a war against Russian imperialism, that Russia is an aggressive imperialist power.

But even if we ignore the entire background to the current war, namely, the “maidan” coup against Ukraine’s elected President Viktor Yanukovych in 2014, engineered by the American “neo-cons”, and the subsequent conflict in eastern Ukraine because of its suppression of the Russian-speaking majority, there is one simple fact that shows who is responsible for the war. The Minsk agreement which could have prevented the war and which Russia had agreed to and adhered to, was torpedoed by the English and the Americans. In fact, it now turns out from Angela Merkel’s admission (which she has subsequently withdrawn because it was embarrassing to the west), that the Minsk agreement was motivated entirely to buy time for Ukraine so that it could properly arm itself. Accepting the Minsk agreement as Russia did can hardly be considered a symptom of Russian imperialism.

The specific argument states that since Russia invaded Ukraine, it must be held squarely responsible for the ongoing war. This too however lacks substance; while invasion is not to be endorsed, it cannot be seen in isolation from the entire set of events that constitute its background. The importance of the overall context was underscored by Lenin in 1915 when he had written in a resolution on the First World war: “The question of which group dealt the first military blow or first declared war is immaterial in any determination of the tactics of socialists” (quoted in The Delphi Initiative, May 6). And the present context is one of expansion eastwards by western imperialism.

A question may be raised: why should Russia be afraid of any such eastward expansion of imperialism? Why should it read anything sinister into such expansion? The answer lies in the tendency of imperialism to break up large countries into smaller fragments so as to dominate them more comprehensively. This tendency which had first manifested itself in the case of Yugoslavia, would be even more pronounced in the case of Russia which is also very rich in natural resources, especially natural gas and to a lesser extent oil. Besides, if Russia gets fragmented, or otherwise dominated, then the way becomes clear for imperialist domination of the many Central Asian republics which are also rich in mineral resources. Imperialist aggressiveness vis-à-vis China too has a very similar motivation, of fragmenting it into insignificance. A country like India incidentally has much to worry about from this tendency of imperialism.

At present of course, among other factors, because of this very aggressiveness vis-à-vis Russia, imperialist hegemony itself is under threat. The “neo-con”-inspired imperialist strategy of seeking world dominance is coming a cropper precisely because of its very aggressiveness. But that is an inevitable consequence of its ambitious project; from the fact that it is coming a cropper, one should not infer its absence. One should not in other words conclude from its failure that this ambitious project was never there to start with. And the people of the third world have rightly seen this project for what it is, which is why there is so much support for Russia.

On Income and Wealth Inequality in Capitalism's Neoliberal Stage

By Prabhat Patnaik

The fact that income and wealth inequalities have increased quite dramatically under the neo-liberal regime is beyond dispute. The empirical work by Piketty’s team bears out the increase in income inequality. They use income tax data to infer about the share of the top 1 per cent of the population of a country in its national income. One may raise objections to this method of estimation, but the conclusions are so overwhelming that one can scarcely quarrel with them. In India’s case for instance Piketty and Chancel find that the top 1 per cent which accounted for just 6 per cent of national income in 1982 increased its share to over 22 per cent in 2013 and a similar figure in 2014, the latest year for which they have estimates. In fact the share in 2013 was the highest it has ever been since income tax was introduced in India in 1922.

Piketty’s theoretical explanation for such increases in income inequality however is totally untenable, as it is based on the presumption that a capitalist economy always operates at full employment, which is not only empirically false but also logically flawed, for in such a case the system would lack any disciplining device without which production cannot occur under it. One does not have to go far however to find a proper theoretical explanation for the increase in income inequality: the removal of all constraints on technological-cum-structural change under a neo-liberal economy increases the rate of growth of labour productivity to a level where, notwithstanding whatever increase occurs in GDP growth, the rate of growth of employment falls compared to earlier and also falls below the natural rate of growth of the work-force, so that the relative size of the labour reserves in the work-force increases; this keeps the real wage rate tied to a subsistence level even as the rise in labour productivity growth increases the share of surplus in total output, and hence the level of income inequality. Piketty’s findings about an increase in personal income inequality are rooted in this increase in class income inequality that neo-liberalism entails (see also Economic Notes in People’s Democracy December 8).

Likewise there has been a dramatic increase in wealth inequality under neo-liberalism at least in the countries of the global south. Between 2000 and 2021, according to Credit Suisse data, wealth inequality increased even in the United States; but this increase was less pronounced than the increase in countries like India and Brazil. True, wealth inequality estimates are always somewhat dicey, since they are influenced by stock market fluctuations. In a period of stock market boom not only does the estimate of total wealth gets artificially inflated even when there has been no change in the physical stock of assets; but, since the rich are much more active in the stock market, their share in wealth also goes up, showing an increase in wealth inequality which gets reversed in a period of stock market collapse. Even so however when India shows an increase in the share of the top 1 per cent in total wealth from around 32 per cent in 2000 to 40.6 per cent in 2021, and when Brazil shows an increase from around 43 per cent in 2000 to 49.3 per cent in 2021, this increase cannot be explained by any evanescent accrual of capital gains to the top 1 per cent of the population. There are clearly more fundamental factors at work.

One such fundamental factor is the rise in income inequality itself that is rooted in the rise in the share of economic surplus in output. If we leave aside the accrual of transitory capital gains, any rise in wealth occurs through savings. This may at first sight appear odd: it may be thought that the rise in wealth would occur only through investment in physical assets; but saving may occur, and hence a rise in wealth, even when there is no investment in a country during a particular period, if it lends these savings abroad, that is, increase its wealth in the form of claims on another country. When the share of the rich in national income rises, since the rich save a higher proportion of the income accruing to them than the poor, their share in the total savings of the country rises even faster. This means that the share of the rich at the margin in the increase in a country’s wealth rises compared to what it had originally been, which means that their share in a country’s total wealth increases. A rise in income inequality in other words ipso facto entails a rise in wealth inequality.

A second factor works in the same direction, and that is what Marx had called “centralisation of capital”. Because of technological-cum-structural change, business shifts over time from small capital to big capital. This happens because new processes and products become available over time which require a growing minimum size of capital for their introduction and which therefore can only be introduced by big capital and not small capital, leading over time to a shift of business from the latter to the former. This shift has exactly the same effect as the rise in the share of economic surplus in total output discussed above: with the shift of business there is also a shift in the distribution of profits from small to big capital (that is, if small capital at all remains in business and is not totally eliminated in which case its entire profits are captured by big capital); since the proportion of savings out of profits is higher for big capital than for small capital, this raises the share of savings in output and also the share of the top 1 per cent within total savings and hence at the margin in total wealth. Wealth concentration therefore is simply implicit in the process of centralisation of capital.

So far we have been talking of changes in wealth concentration at the margin through changes in the distribution of savings. It may be asked: what if investment falls short of savings at the base level of capacity utilisation so that there is a realisation problem? But if there is a realisation problem, i.e., if there is insufficient demand when output is produced at the base level of capacity utilisation, then the realised savings will be lower than the savings that would have been generated from output at the base level of capacity utilisation; but its distribution across classes, i.e., between petty producers and the big capitalists, or between small capitalistsand big capitalists, will remain the same as if all of it was being realised. The tendency towards wealth concentration therefore would remain unaffected by whether or not there is a realisation problem.

A third factor works towards making wealth distribution more unequal, in addition to the two we have mentioned till now. And that is what Marx had called primitive accumulation of capital, which covers not only cases where land is acquired from peasants gratis or at throwaway prices by big capital, but also cases where any land acquired at the then prevailing market price increases in value when industrial units are set up on them or townships are built upon them. This case of an increase in the price of land may at first sight be thought of as being identical with capital gains made on the stock market; but there is a basic difference: while stock market booms may collapse reversing the capital gains, land prices have generally only an upward movement. The acquisition of land even in such cases therefore has to be seen as primitive accumulation, since the peasants are paid a price way below the now-prevailing market price of land (that enters into the calculation of wealth).

The numerous ways that public resources are transferred gratis into the pockets of big capitalists are these days an important source of primitive accumulation of capital. This is done in the name of providing incentives for promoting growth, which is supposed to benefit everyone. But quite apart from such open ways of effecting increasing wealth inequality, big capital also engages in various forms of skulduggery for this purpose. There are instances of communal riots being engineered so as to evict people from their land that is then acquired at a throwaway price by big capital not necessarily directly but at some remove.

All these ways of deliberately effecting an increase in wealth inequality get a fillip in the period of neo-liberalism. All objections to them are brushed aside by the neo-liberal apotheosis of private expropriation as benefitting everyone, while simultaneously vilifying public enterprise.

Prabhat Patnaik is an Indian political economist and political commentator. His books include Accumulation and Stability Under Capitalism (1997), The Value of Money (2009), and Re-envisioning Socialism (2011).

Hunger and Poverty In India: A Case Study on Capitalism, Privatization, and Misleading Statistics

By Prabhat Patnaik

THE Global Hunger Index (GHI) for 2022 has just come out, which shows India occupying the 107th position among the 121 countries for which the index is prepared (countries where hunger is not a noteworthy problem are left out of the index). India’s score on the hunger index is 29.1 which is worse than the score of 28.2 it had in 2014. (The lower the figure the less is hunger). One is so bombarded these days by official talk about India being among the fastest-growing economies of the world, India within sight of becoming a $5 trillion economy, and India being an emerging economic power, that news such as the GHI brings one down to earth. Ironically, the only country in South Asia that is below India on the hunger index, and that too only marginally, is war-ravaged Afghanistan (rank 109); the rank of crisis-hit Sri Lanka is 64, of Nepal 81, of Bangladesh 84 and of Pakistan 99.

The GHI news however should come as no surprise. The fact that hunger in the country is acute and growing, has been pointed out by several scholars. They have used data on per capita daily calorie intake, and per capita annual foodgrain availability to make this point. And they have argued that since growing hunger is a symptom of growing poverty, a proposition that the Planning Commission had originally accepted, the period of neo-liberalism which has seen secularly growing hunger culminating in this year’s GHI, despite the much lauded high GDP growth, must also be a period of growing absolute poverty.

The evidence on secularly growing hunger in the neo-liberal period is quite overwhelming. If we take 1993-94 and 2011-12, the first an NSS “large sample” year closest to the beginning of neo-liberalism, and the second the last NSS “large sample” year for which data have been released by the government, we find that the proportion of the population below 2200 calories per person per day in rural India increased from 58 to 68 per cent; the corresponding figures for urban India where the benchmark was 2100 calories per person per day increased from 57 to 65 per cent. The figures for 2017-18, another NSS “large sample” year, were apparently so appalling that the government decided to suppress them altogether, and even to discontinue the NSS in the old form. But leaked data show that per capita real expenditure for rural India as a whole had fallen by 9 per cent between 2011-12 and 2017-18.

There is however a powerful view among many researchers that this apparently growing incidence of hunger should not be taken as evidence of people becoming worse off over time. There are two strands of this argument. One states that because of pervasive mechanisation, the drudgery of manual work has declined over time, so that working people these days do not need as many calories as they used to earlier. They spend less on food than they used to, and diversify their spending towards other ends. The second strand does not mention the decline in the extent of arduous work, but simply states that people are voluntarily diversifying their expenditure away from such elementary goods as foodgrains, towards both more refined and sophisticated food items, and also towards other commodities like children’s education and proper healthcare.

On both these counts according to them, the decline in per capita foodgrain absorption is symptomatic not of a worsening living standard as of an improvement in living standard; hence to draw conclusions about growing poverty from what appears at first sight as growing hunger (but in fact is a voluntary reduction of foodgrain consumption as part of a better life), is entirely illegitimate. The incidence of poverty, it follows, is not growing but declining, as the government and the World Bank have been claiming (though the latter has recently talked of a rise in poverty during the pandemic).

To repeat, there is no dispute about the decline in per capita foodgrain consumption in India, taking both direct and indirect consumption together, the latter through processed foods and animal feeds; nor is there any dispute about the decline in per capita calorie intake. The real difference is whether this signifies growing poverty or a diversification of consumption away from foodgrains that is symptomatic of a fall in poverty. The fact that an increase in poverty would cause greater hunger is not in doubt; the point is whether the reverse is true, whether reduced ingestion of foodgrains can be taken as proof of growing poverty. The Global Hunger Index becomes useful here.

If reduced food intake was indeed a symptom of an improvement in the condition of life, then we should be expecting many more countries whose growth-rates appear impressive to join India at the bottom of the GHI table. But the countries in India’s neighbourhood on the GHI table, where our rank is 107, are Rwanda (rank 102), Nigeria (103), Ethiopia (104), Republic of Congo (105), Sudan (106), Zambia (108), Afghanistan (109) and Timor-Leste (110). All these are countries that are generally regarded as poor countries, so that their being at the bottom of the table is no surprise. By contrast, countries with which we would like our economic performance to be compared, such as China, are at the top of the table. China appears within the top 17 countries which are collectively, rather than individually, ranked. Its GHI score of less than 5 is way better than India’s 29.1.

The fact that not a single one of the so-called high-growth economies figures alongside India underscores the complete vacuity of the arguments that emphasize a change in tastes (greater keenness for children’s education) or a reduction in “drudgery” (through mechanisation) as being responsible for a (voluntary) reduction in foodgrain consumption. The reduction in “drudgery” owing to mechanisation, or the desire for children’s education, are not characteristics specific to the Indian people; they are universal phenomena. Then why should India alone among the high-growth economies figure near the bottom of the GHI table?

It may be argued that while the desire for children’s education and proper healthcare may be common to people everywhere, in India these are expensive services while in China they may be cheaper. Because of this, parents in India enrolling their children in the more expensive schools may have to cut back on their food consumption, while in China schooling being less expensive, there is no need to cut back on food intake for educating children.

But that is precisely our point, and it has nothing to do with any “change of taste”. Everywhere, parents are keen on their children’s education, but if in a particular country putting them to school requires having to forego food, then this foregoing is symptomatic of an increase in poverty. It indicates an increase in the price of one of the goods in the basket consumed by the people, and hence an increase in the cost of living which is not accompanied by a corresponding increase in money incomes, and leads to a cut in foodgrain consumption. This cut in foodgrain consumption, which means an increase in hunger, is therefore a reflection of a rise in cost of living and hence of a reduced real income; and that exactly is what one means by an increase in poverty.

Put differently, any increase in real income must mean some increase in the consumption of every good in a basket of goods on which this income is spent (or some substitute good for one of these goods). An increase in real income, as cross-section data within India and across countries show, invariably means a rise in foodgrains consumption, not direct consumption alone but direct and indirect consumption taken together. But if there is a decline in the total direct and indirect foodgrain intake, as has been the case in India, then that must mean a decline in real incomes of the majority of the people, and hence a rise in poverty. The link between growing hunger and growing poverty therefore remains valid.

The reason why poverty according to official and World Bank estimates appears to have declined in India, on the basis of which it is claimed that the link between poverty and hunger no longer holds, is because they use a “poverty line”, a particular level of per capita money expenditure below which people are considered poor, which is updated by using a cost-of-living index. But the index as constructed in India does not reckon with the rise in cost of living owing to the privatisation of services like education and health. Therefore the true rise in cost of living is not taken into account, and the poverty line that is updated by using it, keeps falling below what it should have been. This underestimates the magnitude of poverty and the elite laps up this estimated, supposedly-declining, poverty ratio. The Global Hunger Index exposes the falsity of such poverty estimates.

One Hundred Years of Indian Communism

By Prabhat Patnaik

Republished from International Development Economic Associates.

A theoretical analysis of the prevailing situation, from which the proletariat’s relationship with different segments of the bourgeoisie and the peasantry is derived, and with it the Communist Party’s tactics towards other political forces, is central to the Party’s praxis. A study of this praxis over the last one hundred years of the existence of communism in India, though highly instructive, is beyond my scope here. I shall be concerned only with some phases of this long history.

While the Sixth Congress of the Communist International (1928) analysed the colonial question, advancing valuable propositions like “Colonial exploitation produces pauperization, not proletarianization, of the peasantry”, it put forward a line of action for Communist Parties that was sectarian in character; indeed the period following the Sixth Congress, often referred to as the Third Period, is associated with sectarianism. It was at the Seventh Congress in 1935, in the midst of the fight against fascism, which had claimed Ernst Thaelman, Antonio Gramsci and many others among its victims, that this sectarianism was rectified and the need to form united fronts was emphasized. The Seventh Congress tendency was translated into the Indian context by the Dutt-Bradley thesis calling for the formation of an Anti-Imperialist People’s United Front.

The economic programme suggested for such a front included the right to strike, banning reductions of wages and dismissals of workers, an adequate minimum wage and 8-hour day, a 50 per cent reduction in rents and banning the seizure of peasant land against debt by imperialists, native princes, zamindars and money lenders.

Communists being clandestine members of the Congress (the Indian case differed from South Africa in this respect where dual membership, of the SACP and ANC, was possible), and working in cooperation with the Congress Socialist party, were the outcome of this understanding.

This phase came to an end with the German attack on the Soviet Union. The Communist Party’s understanding that the nature of the war had changed because of this attack, though striking a sympathetic chord among many leading Congressmen, was officially rejected both by the CSP and the Congress, which actually launched the Quit India movement at this very time (in which many Communists who had been members of the Congress were also jailed for long periods).

With independence, the question of the nature of the new State and the relationship with the bourgeoisie came to the fore. It caused intense inner-Party debate and ultimately divided the Party. The CPI(M)’s theoretical position, enshrined in its programme, took off from Lenin’s position in pre-revolutionary debates within the RSDLP, a position that was to underlie, one way or another, all third world revolutionary programmes in the twentieth century. Lenin’s argument had been that in countries where the bourgeoisie came late on the historical scene, it lacked the capacity to carry through the anti-feudal democratic revolution, for fear that an attack on feudal property could well rebound into an attack on bourgeois property. It therefore could not fulfil the democratic aspirations of the peasantry. Only a revolution led by the working class in alliance with the peasantry, could carry the democratic revolution to completion, by breaking up feudal property, smashing feudal privileges, and redistributing land. This, far from holding back economic development, would in fact make it more broad-based by enlarging the size of the home market through land reforms, and also more rapid, by accelerating the growth of agriculture.

The post-independence Indian State’s eschewing of radical land redistribution, and its encouraging feudal landlords instead to turn capitalist on their khudkasht land, along with an upper stratum of the peasantry that acquired ownership rights on land from large absentee landlords, was reflective of the bourgeoisie’s entering into an alliance with landlords. Since it was a bourgeois-landlord State under the leadership of the big bourgeoisie, that was pursuing capitalist development, which in the countryside entailed a mixture of landlord and peasant capitalism, the task for the proletariat was to replace this State by an alternative State formed by building an alliance with the bulk of the peasantry, and to carry the democratic revolution forward, eventually to socialism. While the bourgeoisie had ambitions of pursuing a capitalist path that was relatively autonomous of imperialism, it was, the Party noted, collaborating increasingly with foreign finance capital.

Two aspects of this characterization deserve attention. First, it recognized that while capitalist development was being pursued, it was not under the aegis of imperialism. The bourgeoisie was by no means subservient to imperialism, a fact of which the use of the public sector against metropolitan capital, economic decolonization with the help of the Soviet Union, in the sense of recapturing control over the country’s natural resources from metropolitan capital, and the pursuit of non-alignment in foreign policy, were obvious manifestations. Developing capitalism at home in other words did not mean for the post-independence State joining the camp of world capitalism.

Second, the State, while it manifested its class character in defending bourgeois and landlord property and ushering in capitalism, including junker capitalism, did not act exclusively in the interests of the bourgeoisie and the landlords. It appeared to stand above all classes, intervening even in favour of workers and peasants from time to time. Thus while it presided over a process of primitive accumulation of capital, in the sense of the landlords evicting tenants to resume land for capitalist farming, it prevented primitive accumulation in the more usual sense, of the urban big bourgeoisie encroaching on peasant agriculture or artisan production. On the contrary, it not only reserved a quantum of cloth to be produced by the handloom sector, but also intervened in agricultural markets to purchase produce at remunerative prices, an intervention of which the agricultural capitalists, whether kulaks or landlords, were by no means the sole beneficiaries. Likewise, a whole array of measures for agriculture, such as protection from world market fluctuations, subsidised inputs, subsidized institutional credit, new practices and seed varieties being disseminated through State-run extension services, though they conferred the lion’s share of benefits on the emerging capitalist class in the countryside, also benefited large numbers of peasants.

The capitalist development that was pursued was thus sui generis. It was a capitalist development from within, not necessarily with the blessings of imperialism, and, notwithstanding increasing collaboration, often even at the expense of metropolitan capital. Because of this peculiar character, it did not cause an unbridgeable hiatus within society, i.e. within the ranks of the classes that had fought imperialism together during the anti-colonial struggle. Put differently, while the bourgeoisie betrayed many of the promises of the anti-colonial struggle, such as land to the tiller, it did not as long as the dirigiste regime lasted, betray the anti-colonial struggle altogether. This is also why the Party while putting itself in opposition to the regime, supported many of its measures, such as bank nationalization, the development of the public sector and its use for recapturing control over natural resources from metropolitan capital, FERA, and others.

This sui generis character of the capitalism that was being developed has misled many into thinking that it was an “intermediate regime” that presided over it and not a bourgeois-landlord State; but this mistake itself is testimony to its sui generis character. This development could not last for at least four reasons: first, the collapse of the Soviet Union that had made such a development trajectory at all possible; second, the fiscal crisis that the post-independence State increasingly got into inter alia because of massive tax evasion by the bourgeoisie and the landlords; third, the formation of huge blocks of finance capital in the banks of the advanced capitalist countries, especially after the “oil-shocks” of the seventies, which went global after the overthrow of the Bretton-Woods system (itself partly engineered by this finance capital), and which took advantage of the fiscal crisis to push loans to countries like India; and fourth, the fact that the dirigiste regime could not garner the support of the poor, notwithstanding its many pro-poor achievements compared to the colonial period.

The neo-liberal regime under the aegis of the now globalized finance capital represents the pursuit of capitalism of the most orthodox kind, as distinct from the sui generis capitalism of the dirigiste period. The State under neo-liberalism promotes much more exclusively the interests of the ruling classes, especially the corporate-financial oligarchy that gets closely integrated with globalized finance capital, and directly also of globalized finance capital itself (owing its fear that there may be a capital flight otherwise). An unbridgeable hiatus now develops within the country, with the big bourgeoisie aligning itself much more closely with metropolitan capital, having abandoned its ambition of relative autonomy vis-à-vis imperialism.

The neo-liberal regime withdraws to a large extent the support it extended to petty production and peasant agriculture, making it much more vulnerable. A process of primitive accumulation of capital is unleashed upon peasant agriculture not from within the rural economy (through landlords evicting tenants) but from agri-business and big capital from outside; likewise the neo-liberal State facilitates an unleashing of primitive accumulation upon the petty production sector, for instance through demonetization and the shift to a GST regime. Reservation of products for this sector is abandoned. The displaced peasants and petty producers move to towns in search of employment, but employment becomes increasingly scarce because of the abandonment of all constraints on technological-cum-structural change in the economy which the system of licensing had imposed earlier. The swelling reserve army of labour worsens the lot of the organized workers. The fate of the peasants, the agricultural labourers, the petty producers and organized workers get inextricably linked, and this fate worsens greatly, leading not only to a massive widening of economic inequality but also to an accentuation of poverty.

At the same time however neo-liberalism has entailed the shift of a range of activities, especially in the service sector (IT-related services) from the metropolis to the Indian economy which inter alia has increased the growth rate of GDP in the economy. This poses a fresh challenge before the Party because of the following argument.

Marx in his Preface to A Contribution to a Critique of Political Economy had talked of a mode of production becoming historically obsolete when the relations of production characterizing it become a fetter on the development of productive forces. A conclusion is often drawn from this that as long as productive forces continue to develop, that mode of production continues to remain historically progressive. An obvious index of the development of productive forces is the rate of growth of the GDP, whence it follows that as long as this growth remains rapid, opposing a regime in the name of its inequity and exploitative character is historically unwarranted. The Communists on this argument should not oppose neo-liberal globalization, but should join other political forces in accepting it, albeit critically.

This argument however cannot stand scrutiny. Economic historians agree that Russia before the revolution was experiencing unprecedented rates of economic growth, especially industrial growth, and the advanced capitalist world as a whole had witnessed a prolonged boom; yet Lenin had no hesitation in calling capitalism of that time “moribund”. In short to take GDP growth as the marker of the historical state of a mode of production is a form of commodity fetishism; it seeks to locate in the world of “things” phenomena that belong to the world of “relations”.

While other political forces accepted neo-liberal globalization, the Party accordingly steadfastly opposed it. It, along with other Left political forces, stood by the workers and peasants who are victims of neo-liberal globalization instead accepting it as a sign of progress, as many Left formations in other countries have explicitly or implicitly done.

This has brought practical problems. Under the dirigiste regime one measure that separated Communists from others was land reforms. When a Communist government came to power, its task was clear, namely to carry out land reforms. But when land reforms have been completed to a significant extent, the next task is not clear. While industrialization is required, what form it should take and in what way it should be effected, are matters on which the state governments (where Communists are typically located) have very little say within a neo-liberal regime. Hence, Communist state governments within such a regime are often forced to mimic, to their cost, other state governments for effecting industrialization. This is an area where much more thinking and experimentation needs to be done.

Neo-liberal globalization itself however has reached a dead-end, a symptom of which is the mushrooming of authoritarian/fascist regimes in various parts of the world, for the preservation of moribund neo-liberal capitalism, through a combination of repression and of distraction of attention towards the “other” as the enemy. Overcoming this conjuncture is the new challenge before Indian Communism in its centenary year.

The Protracted Crisis of Capitalism

By Prabhat Patnaik

Republished from People’s Democracy.

THERE is a commonly-held view that the current crisis in capitalism, which has resulted in a massive output contraction and increase in unemployment, is because of the pandemic; and that once the pandemic gets over, things will go back to “normal”.

This view is entirely erroneous for two reasons. The first which has been often discussed in this column, has to do with the fact that even before the pandemic the world economy was slowing down. In fact ever since the financial crisis of 2008 following the collapse of the housing bubble, the real economy of the world had never fully recovered. Small recoveries were followed quickly by collapses; and the low unemployment rates in the United States that had prompted Donald Trump’s triumphalism, were to a very large extent explicable by the reduced work participation rate after 2008. In fact if we assume the same work participation rate in 2020(just before the pandemic), as had prevailed on the eve of the financial crisis, then the unemployment rate in the U.S. was as high as 8 per cent as compared to the less than 4 per cent mentioned in official figures.

This slowing down in turn has been a result of the operation of neoliberal capitalism which has massively increased the share of economic surplus in output, both within countries and also at the world level, by keeping the vector of real wage-rates unchanged, even as the vector of labour productivities has increased; and this increase in the share of surplus, or this shift from wages to surplus, has lowered the level of aggregate demand for consumption goods, and hence of overall aggregate demand, as workers spend more on consumption out of a unit of income than the surplus earners.

The pandemic has occurred in this context, so that even after it gets over, the world will still be stuck with the crisis of over-production which had already engulfed it well before the pandemic. To get out of this crisis it is necessary to use State expenditure, provided such expenditure is financed by either taxes on capitalists or by a fiscal deficit ; State expenditure financed by taxes on workers will not help, since workers consume the bulk of their incomes anyway, so that State demand only substitutes workers’ demand without adding to aggregate demand.

But neither fiscal deficits nor taxes on capitalists are liked by finance capital, so that State expenditure as an anti-crisis measure is ruled out. This means that, even after the pandemic is over,not only will the crisis continue, but it will do so without any counteracting measures, at least as long as neoliberal capitalism lasts. This crisis therefore marks a dead-end for neoliberal capitalism.

There is however a second reason why even after the pandemic gets over, capitalism will still remain engulfed in a crisis; and this has to do with the fact that even if the demand for consumer goods recovers to the level where it had been before the pandemic, investment goods production will still remain below what it had been, and this very fact will also ensure that even the consumer good output does not get back to the level where it had been before the pandemic. This is what happens when an economy receives a major shock, of the kind that the pandemic represents for the world economy.

An example will make the point clear. Suppose before the pandemic the economy was growing at 2 per cent per annum. Then capitalists, anticipating a 2 per cent rate of growth, would have been adding to their capital stock also at 2 per cent. If the capital stock was 500, output was 100, then investment would have been 10, and consumption would have been 90. Let the share of post-tax profits and post-tax wage-bill in total private post-tax incomes be 50:50; and let all wages and 75 per cent of profits be consumed. If government consumption (assuming a balanced budget for simplicity) happens to be 20, then this 90 of consumption would have been divided as 20 by government, 30 by capitalists and 40 by workers.

Now, suppose, for argument’s sake, that after the pandemic, consumption recovers to 90. All of it can be produced by the existing capital stock requiring no additional investment. Moreover, there is no reason why the capitalists should expect output to grow at 2 per cent next year; so they would not add 10 to capital stock as they had done before the pandemic. Let us assume that they add only 5 to capital stock, and wait to see what happens before deciding to add any further to capital stock.

Two things will happen in such a case. First, in the capital goods sector, output will be only half of what it had been before the pandemic; likewise capacity utilisation in the capital goods sector will be only half of what it had been before the pandemic. Second, even the consumption demand of 90 cannot be sustained. Assuming the same ratios as above, an investment of 5, which must equal private savings, will generate a total consumption demand of only 55 (given by 20 of government+15 of capitalists out of total post-tax profits of 20 + 20 of workers). Total output will be only 60, equalling consumption of 55 and investment of 5.

The 90 of consumption therefore, which we assumed the world economy to reach, for argument’s sake, will not even materialise. The consumption goods sector’s capacity utilisation will be 61 per cent of what it had been before the pandemic (55 divided by 90). This will be higher than the ratio of capacity utilisation in the investment goods sector compared to what it had been before the pandemic (in fact it will now be only 50 per cent of what it had been earlier).

Any severe external shock to the capitalist system has this effect, namely that investment recovers only after a long time; and precisely for that reason even the recovery of consumption, though less delayed than the recovery of investment, also takes a fairly long time.

In other words, even if there had been no crisis of over-production engulfing world capitalism before the pandemic, the sheer external shock represented by the pandemic would have kept the system mired in crisis for quite a long time. The existence of an over-production crisis predating the pandemic only makes matters worse.

This is exactly what had happened in the U.S. in the recovery from the Great Depression of the 1930s. The consumption goods sector had recovered relatively faster than the investment goods sector, as a result of Roosevelt’s New Deal which had enlarged government spending. The recovery of the investment goods sector occurred only when there was an increase in armament expenditure in preparation for the war, which is why it is said that the recovery from the Great Depression was made possible by the war.

But the New Deal had meant larger government spending which is why at least the consumption goods sector had recovered somewhat, even before the war. Globalised finance capital today does not even allow larger government spending within any economy, either by taxing capitalists or by enlarging the fiscal deficit, the only two ways that such spending can increase aggregate demand. Therefore even the depression in the consumption goods sector will last much longer that in the 1930s, so that, altogether, world capitalism will remain sunk in a protracted crisis for a very long time.

In an economy like India where the government obeys the dictates of finance capital quite slavishly, the prospects of recovery are even bleaker. None of the measures adopted by the government to revive the economy addresses the issue of demand, because the government does not understand that the crisis is because of insufficient aggregate demand. In fact, the government measures are such that they will only aggravate the deficiency of aggregate demand, thereby worsening the crisis rather than alleviating it. As the crisis gets aggravated, however, the government will resort even more strongly to repression against the working people, and intensify even further its communal agenda.

Capitalism's Overproduction Problem: A Primer

By Prabhat Patnaik

Republished from Monthly Review.

It is in the nature of capitalism to have “over-production crises”, i.e., crises arising from “over-production” relative to demand. “Over-production” does not mean that more and more goods keep getting produced relative to demand, so that unsold stocks keep piling up. This may happen only for a brief period in the beginning; but as stocks pile up, production gets curtailed, causing recession and greater unemployment.

“Over-production”, in short, is ex ante, in the sense that if production were to occur at full capacity use (or at some desired level of capacity utilisation), then the amount produced could not be sold because of a shortage of demand. But it manifests itself in reality in terms of recession and greater unemployment.

It is a mistake to believe that such crises are only cyclical in nature, i.e., that they get automatically reversed after a certain period of time. On the contrary, the Great Depression of the 1930s, which was a classic over-production crisis, lasted nearly a decade and was finally overcome because of the war, or, to be precise, because of military expenditure in preparation for the Second World War.

Since 2008, there has again been an over-production crisis that has persisted with varying intensity right until now. There is, thus, no question of an over-production crisis under capitalism automatically disappearing. But what was striking about the erstwhile socialist economies of the Soviet Union and Eastern Europe is that they were free from over-production crises. The question is why?

Over-production crises under capitalism arise because of two main reasons. One, investment decisions under capitalism depend upon the expected growth of demand, for which the current growth of demand is taken as a clue: if demand slows down then investment gets restrained. Two, whenever investment gets restrained, so does consumption and hence total income (this is called the “multiplier” effect of investment).

Both these factors were eliminated under socialism. Investment was undertaken according to a plan and not the dictates of profitability; hence, there was no question of investment being curtailed when the growth of demand slowed down for any reason. This is not to say that there were no fluctuations in the level of investment. These fluctuations, however, arose not in response to profit expectations, but for entirely exogenous reasons, of which, two in particular were important.

One was agricultural output fluctuations. In years when the agricultural output went down for weather-related, or some other, reasons, investment was cut, in order to prevent excessive upward pressures on food prices; correspondingly when agricultural output revived, so did investment. These investment fluctuations, however, had nothing to do with any calculations of profitability on investment; they were unavoidable even in a planned economy.

The second reason was the operation of “echo effects”. Suppose, for instance, that a whole lot of new investment had been installed in a bunched manner at a certain date, say the beginning of the planning period. These pieces of equipment would become due for retirement again in a bunched manner around the same time some years later, which would, therefore, push up the investment plan, and hence the real gross investment around that time, so that both net investment and replacement needs are accommodated. The investment figure, therefore, would not show a steady growth but would exhibit fluctuations. But these fluctuations again had nothing to do with any calculations of profitability; they arose because of past investment history.

But even when such investment fluctuations occurred, socialist economies ensured that they did not lead to fluctuations in consumption and income, i.e., those economies snapped the multiplier relationship that necessarily characterises capitalism. This is because all firms in the economy were asked to produce to their capacity, and, if demand was low because of investment being curtailed, then they were asked to lower their prices until whatever they produced got sold.

At these “market-clearing” prices, some firms would make losses, while others would still make profits; but this would not matter since both the profit-making and the loss-making firms belonged to the State, which could, therefore, cross-subsidise the loss-making ones from the profits of the profit-making ones. And taking both groups of firms together, there would always be positive net profits as long as investment was positive (even if lower than would have been otherwise).

This was a remarkable break from what happens under capitalism, and provides a clue to why output and employment fall in a crisis there. Under capitalism, a firm does not produce when prices do not cover costs; and when demand is low, prices do not fall, because they are “administered” through collusion among the oligopolistic firms. Instead, output, and hence employment, fall in order to equate supply with demand, and to eliminate stocks which might have got built up briefly.

The matter can be looked at somewhat differently. A fall in price, with money wages and employment given, which is what happened under socialism, meant a rise in the share of wages in total output; income distribution in short shifted in favour of the workers. Since workers more or less consume their entire wages, such a shift in income distribution in favour of the workers raised the share of consumption in total output. Thus, socialist economies never experienced over-production crises because even when investment fell for some reason, output was kept unchanged and the share of consumption rose to compensate for the fall in investment (through a rise in the workers’ share in output).

This, however, can never happen under capitalism because capitalists would never voluntarily agree to a lowering of their share in output and a corresponding increase in workers’ share, even in a situation of inadequate aggregate demand. This is why capitalism experiences over-production crises: income distribution here is a matter of intense class-struggle where there is no question of capitalists agreeing to lower their own share and correspondingly raise workers’ share for the sake of overcoming a situation of over-production.

The “multiplier” that operates under capitalism, whereby a reduction in investment causes a reduction in consumption and hence total output, occurs because of income distribution not being adjustable. The “multiplier”, in other words, is predicated upon the relative shares among capitalists and workers being given.

In fact, under capitalism, far from the workers’ share rising to offset the problem of insufficient demand, the tendency in periods of crisis is the exact opposite, namely, to cut wages and raise the share of profits, which, in a situation of reduced investment that brought about the crisis in the first place, actually compounds the crisis. A 10% fall in investment in such a situation does not just bring about a 10% fall in output, as the “multiplier” analysis would suggest, but a more than 10% fall in output, say a 15% fall, because an additional squeeze on consumption through a fall in workers’ share (via the wage cut) is further superimposed upon the reduction in investment.

The fact that the relative share of the workers is not allowed to increase in order to offset the tendency towards over-production, which is a basic characteristic of capitalism, also shows its supreme irrationality as a system. It shows that the system would rather have larger unutilised capacity and unemployment, i.e., a sheer waste of productive resources for lack of demand, than produce as before by avoiding this waste through giving more to the workers. From its point of view, wasted resources are preferable to using these resources to improve workers’ consumption. True, not being a planned system, it does not make such calculations consciously; but that is what its immanent tendencies amount to. Socialism avoids any waste or slack, such as is caused by a crisis, by raising the consumption of workers appropriately to avert it.

As the collapse of the Soviet Union recedes further into history, people increasingly forget that a system had existed there, which, notwithstanding its many limitations and defects, had nonetheless been free of unemployment, of over-production crises and of the irrationality of capitalism.

Prabhat Patnaik is Professor Emeritus at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. His books include Accumulation and Stability Under Capitalism (1997), The Value of Money (2009), and Re-envisioning Socialism (2011).