Prabhat Patnaik is Professor Emeritus at the Center for Economic Studies and Planning at Jawaharlal Nehru University, New Delhi. His books include Accumulation and Stability Under Capitalism, The Value of Money, and Re-envisioning Socialism. This article is the revised text of a keynote address delivered at a conference organized by the Geopolitical Economy Research Group at the University of Manitoba in September 2015.

I

The “thirty-year crisis” of capitalism, which encompassed two world wars and the Great Depression, was followed by a period that some economists call the Golden Age of capitalism. Today, however, capitalism is once again enmeshed in a crisis that portends far-reaching consequences. I am not referring here to the mere phenomenon of the generally slower average growth that has marked the system since the mid-1970s. Rather, I am talking specifically of the crisis that started with the collapse of the U.S. housing bubble in 2007-8 and which, far from abating, is only becoming more pronounced.

The Western media often give the impression that the capitalist world is slowly emerging from this crisis. Since the Eurozone continues to be mired in stagnation, this impression derives entirely from the experience of the United States, where there has been talk of raising the interest rate on the grounds that the crisis is over, and inflation is now the new threat. There are, however, two points about the U.S. “recovery” that need to be noted.

First, the so-called recovery has been greatly influenced by the boost in consumer demand, which in turn was stimulated by the drastic fall in oil prices. However, this increased demand has not been accompanied by any notable increase in investment activity, despite the fact that long-term interest rates are near zero—that is, despite a monetary policy that has been as supportive as it can be. We have, in other words, a repeat of the situation of the late 1930s, prior to the U.S. rearmament drive, when capacity utilization improved in the consumption goods sector without much recovery in the capital goods sector.1

Secondly, even this limited recovery in the United States has coincided with an extraordinarily high rate of unemployment. Official statistics show an exactly opposite picture, of a decline in unemployment to just 5 percent at present. But what is missed in these figures is the large exodus from the labor force: millions have become too discouraged to continue seeking work, and are therefore no longer counted as unemployed. In fact, if one takes the labor force to working-age population ratio (the labor force participation rate) from 2007, when the Great Recession began, and recalculates the size of the current labor force on that basis, then the current unemployment rate would be around 11 percent.2 Many would put the figure even higher, on the grounds that the official size of the labor force is an underestimate even for the base date.

To claim, therefore, that the United States is experiencing a full recovery is, in terms of working class well-being and economic security, wrong. And if we consider the rest of the world, especially recent developments in the “emerging economies,” the situation is much worse.

II

The most significant of these developments is the slowing down of the growth rate in countries like India and China—that is, the spread of the crisis to the so-called emerging economies, especially China. Let us locate this slowdown in its proper context.

Since 2005, the trade-weighted exchange rate (TWER) of China—its exchange rate vis-à-vis a basket of currencies, where the weight of each currency depends upon its relative importance in China’s trade—has appreciated by 50 percent. Even between 2009, when the TWER spiked, and 2015, the extent of appreciation was 20 percent. This basically meant that the Chinese economy was creating more room for the rest of the world to compete with it, and hence, in effect, to grow at China’s own expense. China could afford to do so because an asset price bubble was then sustaining its domestic growth rate. In a sense, therefore, China was supporting the growth rate of the rest of the world, in much the same way that the United States had done decades earlier—though of course the stimulus provided by China was not as large. This Chinese support explains why the crisis continued, but not in as accentuated a form as it would have otherwise.

But the asset price bubble in China has now collapsed, which, together with the effect of global stagnation on Chinese exports, has slowed the nation’s growth rate. This explains the recent devaluation of the yuan by a little less than 4 percent, and the Chinese government’s apparent willingness to effect greater devaluation in the future, camouflaged as a commitment to make the yuan more “market-determined.”

In a number of ways, the devaluation of the yuan, and official hints that further devaluations cannot be ruled out, constitutes the start of a whole new dynamic. First, it marks the beginning of a spate of competitive currency depreciations—apparently effected by the market but with the connivance of their respective governments—and hence of “beggar-thy-neighbor” policies, another echo of the 1930s, after the collapse of the gold standard. Indeed, after the devaluation of the yuan, several currencies have also depreciated vis-à-vis the dollar. This is because the “market”—that is, speculators—have expected such depreciations and hence behaved in a way that actually brings them about. Meanwhile, goverments have been either unwilling to intervene to support their currencies, since that would hurt competitiveness and reduce net exports, or unable to do so, in cases where they lack adequate foreign exchange reserves.

This spate of currency depreciations, which are likely to recur, represents, in effect, a struggle between countries for a larger share in a non-expanding world market. I discuss the issue of non-expansion below, but two points about this struggle over markets should be noted here. First, the United States is at a disadvantage in this struggle, since the currency depreciations are all vis-à-vis the U.S. dollar. This means that there is no way that the dollar itself can be made to depreciate relative to other currencies. The United States has predictably postponed the increase in its interest rate, which the Fed has been promising for some time, since such an increase would only have appreciated the value of the dollar still further. Unfortunately, the Fed cannot lower its interest rates any further since they are already close to zero, and monetary policy is incapable of pushing them into negative digits.

Thus, while the United States cannot use monetary policy to defend its net exports and hence prevent the additional unemployment arising from a reduction in net exports, it also cannot even hope that the value of the dollar vis-à-vis other currencies will stabilize at their current level. When other currencies fall relative to the dollar, it only strengthens the tendency of wealth-holders around the world to flock to the dollar. This means that the undermining of the United States’ net-exports position will continue, thereby exacerbating U.S. unemployment. In short, the dollar’s role as a universal medium of wealth-holding, which has allowed the United States to finance massive current account deficits, will act as an albatross at the level of domestic activity and employment.

To defend its domestic activity, the United States therefore has no alternative policy measure but to impose implicit or explicit trade restrictions, such as those in the Bring Jobs Home Act introduced in the Senate in July 2014. For even if the United States were to overcome the neoliberal aversion to fiscal activism in pursuit of larger employment and actually undertake a fiscal stimulus, without trade restrictions, the employment-generating effects of such a stimulus would leak out abroad even more than before. But any imposition of trade restrictions would undermine the neoliberal order, presided over by international finance capital, which the United States is committed to defending.

The second point to note about this struggle over a non-expanding world market is that it would no longer just remain “non-expanding” in the weak sense of the term, but would actually begin to contract. This is because in a situation of widespread currency depreciation all currencies do not move up or down exactly synchronously. Consequently the calculation of profitability on projects becomes more difficult, as costs and revenues can fluctuate over any arbitrary stretch of time. Hence, the risks associated with investment increase, causing everywhere a shrinking of investment below what it otherwise would have been, and with it an overall contraction in the world market.

This brings us to the second aspect of the new dynamic. The recent fall in China’s growth rate has led to a collapse in world commodity prices (though some, like oil, began falling even earlier). This has already affected the growth rates of a whole range of countries dependent on commodity exports, like Australia, Chile, and Brazil, with the latter now “officially” declared to be suffering from a recession. The generalized fall in commodity prices will serve to shrink the world market still further.

True, I said earlier that the fall in oil prices was a factor in boosting demand in the United States and hence provided a demand stimulus for the world economy. But there is a difference between the effect of a fall in oil prices alone and that of a fall in commodity prices in general. In the case of oil, the mean “marginal propensity” to spend—to use a Keynesian term—is higher for the buyers than for the sellers (since the latter are dominated by kings and sheikhs), while the opposite is likely to be true for other commodities.

Though the fall in commodity prices in itself constitutes an additional cause of the worsening crisis, it poses a still greater threat through another channel, namely the prospect of what the early twentieth-century economist Irving Fisher called “debt deflation.”3 Fisher argued that if primary commodity prices, and consequently manufactured goods prices, fall, then the real burden of debt goes up for those for whom such goods appear on the asset side, against money-denominated debt obligations on the liability side. To improve their balance sheets, therefore, they try selling these assets, which only makes things worse, leading to huge falls in asset prices and hence to bankruptcies that deepen the recession. The advanced capitalist countries have been on the brink of deflation for a long time; current developments may push them over the edge and compound the crisis greatly.

The third feature of the current crisis is the tendency toward falling stock prices. This can be part of the above-mentioned process of a commodity price fall-induced debt deflation itself. And insofar as the prospect of slower growth leads to stock price falls, independent of any fall in commodity prices, it can be an autonomous source of debt deflation. Falling stock prices, in other words, would also increase the pressure for balance sheet adjustments, which result in further falls in stock prices—and so on.

What is particularly noteworthy here is that these three aspects—falls in exchange rates (vis-à-vis the U.S. dollar), in commodity prices, and in stock prices—are likely to reinforce one another, as is happening now. World capitalism, in short, is poised for a serious accentuation of the crisis. And at the core of this crisis is the fact that there are no expansionary factors working towards an increase in the size of the world market. On the contrary, even the long-run tendency is now in the opposite direction, toward contraction. Let us now examine this latter issue.

III

A long line of argument going back to Rosa Luxemburg and Michał Kalecki states that a capitalist economy requires exogenous stimuli, as distinct from endogenous stimuli, for its sustained growth.4 “Endogenous stimuli” are those stimuli for increased productive capacity that arise from the very fact that the economy has been growing. Their inadequacy for explaining sustained growth arises from the following problem: just as an economy subject to growth generates expectations of future growth, and hence induces capitalists to add to capacity in anticipation of such expansion, thereby keeping the momentum of growth going, so any slackening must work in the opposite direction. Capitalists must cut back on additions to productive capacity, and this will exacerbate such slowing of growth. And if an economy is caught in stagnation with no expansion at all, then capitalists have no reason to expect any growth (if endogenous stimuli are all that exist), and hence will not add to productive capacity, which in turn, by suppressing demand, would tether the economy to stagnation.

Since this has not been the actual experience of capitalist economies, then there must be exogenous stimuli that bring forth investment, or autonomous additions to demand, quite independently of whether the economy has been growing. Exogenous stimuli, in short, prevent the economy from remaining trapped in stagnation and explain sustained long-term growth.

This argument follows quite simply from a rejection of Say’s Law, that is, from a recognition of the possibility of a deficiency of aggregate demand. The fact that aggregate demand may be deficient is what makes capitalists assess demand prospects before deciding to increase capacity, and this in turn is what makes endogenous stimuli insufficient for explaining growth, and giving rise to the need for exogenous stimuli.5

Among exogenous stimuli, three in particular have received attention from economists: pre-capitalist markets, state expenditure, and innovations. I use the last term in its widest sense: advances which make capitalists, with access to some new process or product, undertake additions to capacity in the hope of stealing a march over their rivals (or at least of not falling behind). However, the role of innovations as exogenous stimuli has been questioned, in my view legitimately, by a number of writers.6 In oligopolistic markets, where price cuts to sell at the expense of rivals are generally eschewed, capitalists tend to give whatever investment they would have otherwise undertaken the form that innovation demands, rather than actually undertaking additional investment (that is, adding further to capacity), and in that case innovations cease to be genuinely exogenous stimuli. This is also confirmed by economic historians, who show that during the interwar Great Depression, the available innovations, instead of helping capitalism overcome its crisis, actually remained unused, and were introduced only in the postwar period of high aggregate demand.

Pre-capitalist markets, or more generally the phenomenon of capital pushing outwards from its metropolitan core, played an important role as an exogenous stimulus in the pre-First World War period. The picture, however, was not as straightforward as Rosa Luxemburg suggested, in which capitalism simply selling at the expense of the pre-capitalist producers in the colonies. It was much more complex. Both labor and capital migrated from the metropoles of Europe toward the temperate regions of white settlement, such as the United States, Canada, Australia, New Zealand, South Africa, and Argentina. Over four-fifths of all capital exports went to these regions. But the goods produced in the metropolis, especially in Britain, the largest capital exporter of the period, were not necessarily the ones most in demand in these developing “new regions,” which rather required raw materials and foodstuffs from the tropical zones. Metropolitan goods were sold in the tropical colonies, and the tropical goods were exported to the new regions.

The important point is that the tropical goods exported from the tropical colonies to the new regions in this system, which was dominated by the British, were not just equal in value to the metropolitan goods imported to the tropical colonies. That is, the tropical colonies were not merely used to change the form of the goods exported to the new white settler regions. The tropical exports to the “new world” were of much greater value than the goods the tropical countries received as imports from the metropolis, and while the domestic currency payment to the local producers of this export surplus came out of the colonial government’s tax revenue (extracted largely from the very same producers), the gold and foreign exchange earnings from this export surplus were appropriated by the metropolitan country, without the tropical colony acquiring any claims upon the metropolis. This difference therefore constituted a gratuitous extraction by the metropolis from the tropical colonies without any quid pro quo (an imbalance that Indian nationalist writers, who were the first to uncover it, called a “drain of surplus” from the colonies).

The exogenous stimulus in the pre-First World War period, in other words, came from the colonial system, which incorporated both the colonies of conquest, like India, and the colonies of settlement, like the United States, through a complex mechanism. This mechanism had three interlinked elements: a process of “deindustrialization,” that is, displacement of pre-capitalist producers, notably textile manufacturers, inflicted upon the colonies of conquest by imports from the metropolis, which Rosa Luxemburg highlighted; the drain of surplus described above; and through this drain the ability of the metropolis to export capital for developing regions of recent settlement, in the commodity-form of tropical primary commodities, which these regions needed. The largest colony of conquest, India, posted the second largest merchandise trade surplus in the world for fifty years before 1928—second only to the United States—but its exchange earnings were entirely appropriated for supporting the metropolitan balance of payments.7

This entire arrangement, which underlay the secular boom spanning the Victorian and Edwardian eras, fell apart after the First World War. We need not enter here in detail into the reasons for this collapse, which included, inter alia, the “closing of the frontier”; the encroachment by Japan on the Asian colonial markets of Britain; and the world agricultural crisis, which led to a collapse of the colonies’ exchange earnings, undermining the triangular system of payments.8

The subsequent interwar period was thus one when capitalism was without any exogenous stimulus, with the colonial system no longer effective and state intervention in “demand management” not yet even part of the theoretical discourse.9 Is it any surprise then that the Great Depression of the 1930s occurred precisely during this period?

State intervention to boost aggregate demand was tried first in Japan under Finance Minister Takahashi in 1931, but was extended by the Japanese militarists far beyond what Takahashi had wanted—to the point of having him murdered when he objected to higher military spending. It was introduced in Germany in 1933 with the Nazi rearmament drive. In the liberal bourgeois economies, it came on the eve of the war itself, with a stepping up of military expenditure necessitated by the fascist threat. It became a normal feature of capitalism, as distinct from a mere contingent necessity, only in the postwar years when, under the twin impact of the socialist threat from outside and of working-class restiveness from within, metropolitan capitalism was forced to abandon for the moment the principles of “sound finance.” Such working-class agitation within the metropolis arose because workers who had made great sacrifices during the war were unwilling to return to their pre-war situation of unemployment and poverty.

The postwar years of state intervention in demand management, which produced low levels of unemployment unprecedented in the history of capitalism, and hence high levels of growth (in response to the high demand), high levels of growth in labor productivity, and high levels of growth in real wages, have been described as a Golden Age of capitalism. While state intervention occurred in nearly every nation, the entire system was also buttressed by massive military expenditure by the United States, which opened (and maintains) a string of military bases all over the globe. As the Vietnam War escalated and U.S. military expenditure swelled, financed by printed dollars—decreed to be as good as gold under the Bretton Woods system—the rest of the world was obliged to hold on to these dollars, even as excess demand generated inflation. This inflation prompted a shift to commodities, and later to gold, resulting in the abandonment of the Bretton Woods system. An engineered recession followed, made worse by the fact that the price of one crucial commodity, oil, was kept up by a cartel, OPEC, even as other prices subsided.

But if the mid-1970s recession in the capitalist world was the start of the dismantling of state intervention in demand management, the basis for this dismantling lay elsewhere. It lay in the phenomenon of the globalization of capital, especially finance capital, which had been occurring since the late 1960s and which had since gathered momentum. The regime of globalized finance meant that while finance was international, the state remained a nation-state. All nation-states therefore had to bow before the demands of finance capital in order to prevent any capital flight.

This in turn meant controlling fiscal deficits, because, as we have seen, finance capital favors “sound finance” and dislikes fiscal deficits; it also meant reducing the tax burden on capitalists. These together snuffed out the scope for state intervention in demand management. Any stimulation of activity, either through a fiscal deficit or through a balanced budget multiplier (where revenues are raised to match increased state expenditure by taxing the rich) became well-nigh impossible.10 Subsequently, of course, austerity in government spending was projected as a virtue on the purported grounds that private investment was crowded out by government “profligacy,” an argument which was only Say’s Law (supply creates its own demand) in a new guise.

The point of this disquisition is to suggest that capitalism in the present era, the era of globalization which entails above all the globalization of finance, is without either of its two main exogenous stimuli—pre-capitalist markets and state spending to boost demand. The only stimulus for a boom therefore, apart from debt-financed enhancement of consumer expenditure (which can only be transient), arises from the formation of occasional asset-price bubbles. But such bubbles, even though they may produce occasional booms, inevitably collapse, so that the average level of activity through booms and slumps is lower than under the regime of state intervention. Besides, asset-price bubbles cannot be made to order; the system cannot hold a gun to the heads of speculators and force them to feel the kind of euphoric expectations that underlie bubbles. Consequently there may be long intervals, even during this period of general slow growth, when the system is submerged in prolonged stagnation and recession. There is, however, an additional factor of great importance that makes matters even worse in the era of globalization. Let us turn to it now.

IV

In the period before the current globalization, the world economy was deeply segmented. Labor from the South was not allowed to move freely to the North. As W. Arthur Lewis pointed out, there were two great streams of migration in the nineteenth century: a migration of labor from tropical and subtropical regions like India and China, which went as “coolie” or indentured labor to other tropical or subtropical regions; and a migration of labor from temperate zones of Europe, which went to other temperate regions like the United States, Canada, and Australia.11 Once the era of slavery had run its course, these two streams were kept strictly separate through severe restrictions on tropical migration to the temperate lands.

But while tropical labor was not free to move into the temperate regions, capital from the latter was free to move into the former. Yet despite this formal freedom, capital chose not to do so except in specific spheres like mines, plantations, and external trade. In particular, it did not move manufacturing to the tropical regions, despite the very low wages prevailing there—a result of the process of deindustrialization mentioned earlier. Capital from the temperate regions generally moved into other countries within the temperate region itself, complementing the flow of labor migration.

The world economy was therefore segmented between the tropical and the temperate regions. In this segmented universe, the labor reserves of the South did not restrain the rise of real wages in the North when labor productivity increased. There was consequently, on the one hand, a widening of inequalities between the North and the South that encompassed even the workers, and on the other hand, a boost to demand in the North from rising wages that would not have occurred in the absence of this segmentation.12

Contemporary globalization has brought this segmentation to an end. Even though labor from the South is still not free to move to the North, capital from the North is now far more willing than before to locate manufacturing and service-sector activities—the latter largely through outsourcing—in the South. This now makes real wages in the North subject to the baneful influence of the massive labor reserves of the South. Not that real wages in the United States or any other advanced country are anywhere near parity with Southern real wages. However, they tend to remain stagnant even as labor productivity increases in the North. In fact, in the period of globalization, while the vector of real wages across the world remains more or less unchanged owing to the restraining influence of third-world labor reserves, the vector of labor productivities increases across the world. Both in individual countries and in the world as a whole, therefore, the tendency is for the share of surplus in output to increase. It is this context which explains Joseph Stiglitz’s finding that even as the labor productivity in the United States has increased substantially between 1968 and 2011, the real wage rate of an American male worker has not increased during this period; indeed if anything it has marginally declined.13

This has two major implications. First, the increase in inequality now is not so much between two geographical parts of the globe (indeed, several third-world countries have experienced faster per capita income growth than the advanced capitalist world) as between the working people of the world on the one side and the capitalists of the world and others living off the surplus on the other. It is this increase in “vertical” as distinct from “horizontal” inequality that is reflected in recent works by several mainstream economists, like those of Thomas Piketty, though they attribute this inequality to altogether different and unpersuasive reasons.

The second implication is that, since the “marginal propensity to consume”—again to use a Keynesian expression—is higher from wage income than from incomes derived from economic surplus, this growing vertical inequality in incomes (or, more precisely, the tendency toward a rise in the share of surplus in world output) produces a tendency toward a deficiency of aggregate demand and the problem of surplus absorption.

This of course is an ex ante tendency, which could be kept in check if—as Baran and Sweezy argued, noting a tendency toward such stagnation in the United States a half-century ago—state expenditure could be appropriately increased to counteract it.14But what is noteworthy about the current period of globalization is that it both produces an ex ante tendency towards global demand deficiency and also prevents any possible counteracting state expenditure to overcome this tendency, due to the opposition of the vested interests to fiscal deficits and taxes on the rich. (It should be noted that larger state expenditure financed through taxes on the poor and the working class, who have a high propensity to consume anyway, does not boost aggregate demand, and so cannot counteract the tendency toward deficient demand.)

The only offset against this trend toward demand deficiency, therefore, can come from the occasional asset price bubbles discussed earlier. Unfortunately, since they cannot be made to order, and since they inevitably collapse, the world economy in the era of globalization becomes particularly vulnerable to crises of recession and stagnation, which is exactly what we are now experiencing.

In other words, when we combine these two features of the current globalization—namely the absence of any exogenous stimuli together with the endogenous tendency toward a global demand deficiency—we get an inkling of the structural susceptibility of contemporary capitalism to protracted stagnation. Either of these two features, i.e., the internal and external contradictions, would produce a tendency toward stagnation on its own. In the current period, however, the two features act together, and it is this fact which underlies the travails of contemporary capitalism.

V

The economic implications of protracted stagnation, and the possible systemic responses to it at the macroeconomic level, are matters I shall not enter into here. I shall, however, end by drawing attention to an obvious political implication, one that relates to the threat to democracy that this protracted stagnation poses, of particular significance in the case of my own country, India.

The general incompatibility between capitalism and democracy is too obvious to need repetition here: capitalism is a spontaneous system driven by its own immanent tendencies, while the essence of democracy lies in people intervening through collective political praxis to shape their destinies, including especially their economic destinies, which militates against this spontaneity. The fate of Keynesianism, which thought that capitalism could be made to operate at close to full employment, and thereby be made into a humane system through state intervention in demand management, shows the impossibility of the project of retaining capitalism while overcoming its spontaneity.

This conflict becomes particularly acute in the era of globalization, when finance capital becomes globalized, while the state, which remains the only possible instrument through which the people could intervene on their own behalf, remains a nation-state. Here, as already mentioned, the state accedes to the demands of finance capital, so that no matter whom the people elect, the same policies remain in place, as long as the country remains within the vortex of globalized finance. Greece is only the latest example to underscore this point.

But once we reckon with the tendency of the system in the era of globalization to fall into a protracted crisis, this incompatibility becomes even more serious. In the context of crisis-induced mass unemployment, the corporate-financial oligarchies that rule many countries actively promote divisive, fascist, and semi-fascist movements, so that while the shell of democracy is preserved, their own rule is not threatened by any concerted class action. And the governments formed by such elements, even when they do not move immediately towards the imposition of a fascist state as in the case of classical fascism, move nonetheless towards a “fascification” of the society and the polity that constitutes a negation of democracy. In third-world societies such fascification not only continues but even increases the scope for “primitive accumulation of capital” at the expense of petty producers (which also ensures that the world labor reserves are not exhausted).

But that is not all. Since such fascism invites retaliation in the form of counter-fascistic movements, as in the case of Hindu supremacism in India, which is starting to encourage a Muslim fundamentalist response, the net result is social disintegration. This disintegration is the denouement of the current globalization in societies like mine, and no doubt in many others. It is important, of course, to struggle against this, but at the current juncture, when there are no international workers’ movements, let alone any international peasant movements, and hence no prospects for any synchronized transcendence of capitalist globalization, any such struggles must necessarily be informed by an agenda of “delinking” from capitalist globalization. This delinking should entail capital controls, management of foreign trade, and an expansion of the domestic market through the protection and encouragement of petty production, including peasant agriculture; through larger welfare expenditure by the state; and through a more egalitarian distribution of wealth and income.

Notes