by Utsa Patnaik
In addition to these, there is the monetarist explanation by Milton Friedman, which sees money supply changes as the underlying factor behind the Great Depression. But Friedman’s explanation, already critiqued by Kindleberger, is not only based on a flawed theory (which is true of monetarism in all its versions), but also a flawed epistemology (which is specific to Friedman). So we shall not be concerned with it in what follows.
Taking the other explanations, no doubt there are elements of truth in most of them. An event like the Great Depression, which represents the breakdown of an entire order, and hence involves the simultaneous malfunctioning of several of the interrelated parts that constituted that order, permits, not implausibly, the identification of any one of those particular parts as the source that caused the breakdown of the whole. Our concern here is not with the question of which of these is the better explanation but whether they constitute, all taken together, an exhaustive account of the breakdown, or have missed some key element. Let us therefore look at these explanations, at least the prominent ones, from this perspective.
Even if one accepts Schumpeter’s explanation as valid for understanding the depth of the crisis, it still leaves open the question of why the Depression lasted so long. As is well known, the liberal capitalist world, as distinct from the fascist countries, came out of it only with war preparations in the late 1930s.1 The fascist countries had come out of it earlier because of arming themselves to perpetrate the war. To this question of why the Depression lasted so long, Schumpeter’s answer was a political one, namely the hostility toward business that had surfaced during the 1930s, especially in the United States. This answer was challenged by Arthur Smithies many years ago, and we need not repeat his arguments here.2
There is, however, a theoretical problem with Schumpeter’s explanation. The “circular flow,” which represented the state of equilibrium in his analysis around which cyclical fluctuations occurred, was a Walrasian equilibrium with full employment. Even his cycles were primarily price cycles rather than employment cycles, as Oskar Lange pointed out in a review of his opus long ago.3 Schumpeter, in short, did not recognize the possibility of a deficiency in aggregate demand. Thus, not only is there an empirical problem in explaining through his analysis the massive unemployment that was the hallmark of the Great Depression, but the theoretical premise of his overall argument is flawed, as the Kaleckian-Keynesian revolution in macroeconomics pointed out. Indeed, this latter tradition saw capitalism generally as a demand-constrained system.
From within the Keynesian tradition, Alvin Hansen’s explanation of the Depression as arising from a closing of the frontier, which, according to him, dampened the investment drive that had long sustained a capitalist boom, is the most noteworthy. What we argued earlier, that the loss of colonial markets for British imperialism played a crucial role in precipitating the crisis, is in no way incompatible with the “closing of the frontier” argument.
The “colonial arrangement” included as part of the total picture the pushing of the frontier through emigration of labor from Europe to the temperate regions of new settlement and the complementary export of capital from Europe, financed by the drain from the tropical colonies. The unraveling of the colonial arrangement, owing to two factors, namely the loss of colonial markets and the world agricultural crisis causing a price crash for agricultural goods that made the colonial drain insufficient for balancing the British balance of payments, have already been discussed by us. The “closing of the frontier” emphasized by Hansen can be seen as the third component in the unraveling of the colonial arrangement.
But in view of the fact that the “closing of the frontier” argument is usually silent about the role of the colonies, a few further words on this role are in order. It may be thought that since Europe was exporting capital to the new regions of European settlement, and even using the surplus from the colonies for this purpose, it is the investment opportunity available in these regions that kept the system going. In short, the colonies were quite unimportant when it came to finding the stimulus for growth; this stimulus lay in the pushing of the frontier.
This, however, is a flawed conception. The goods demanded by the new regions of European settlement were not the goods produced by Britain, the leading capital exporter. Therefore, the stimulus for investment in Britain came not from the demand from the new regions, because the new regions had little appetite for British goods. Likewise, if there was demand for tropical products in these new regions, and capital exports from Britain simply amounted to taking the credit for tropical goods that were exported, which were not goods of its own, then the need of a market for British goods cannot be said to have been solved by the pushing of the frontier. Thus Britain cannot be said to have sustained its own boom, upon which in turn the entire capitalist world depended because of their encroachment upon the British market, by the mere pushing of the frontier without any reference to colonialism.
Britain’s markets, and hence investment stimulus, came from its ability to export at will to tropical colonies like India and semi-colonies like China. And since Britain provided a market to other capitalist countries, their investment stimulus was maintained through the penetration of the British market by their manufactured goods, so that they too indirectly derived their investment stimulus from encroachment on the tropical colonies. In other words, to focus on the closing of the frontier as the cause of the crisis is to miss the point, at least as far as Britain was concerned and hence all those countries benefitting from the availability of the British market; the real stimulus here came from colonialism. The United States had a merchandise trade surplus with the U.K., in 1928 of $610 million, as Hilkgerdt’s estimates quoted in chapter 10 show, and Europe of $560 million; any loss of the U.K. market therefore would have caused a recessionary impact on the entire capitalist world. The loss of colonial markets thus started a process, as far as Britain was concerned, and, through its second-order effects on other countries, that led to the Great Depression.
But, of course, the closing of the frontier would have played an important role in precipitating a crisis in the U.S. economy, which in turn would also have had its own second-order effect on other countries, including Britain itself. We thus have a complex picture, where all three elements constituting the collapse of the colonial arrangement played a role. To emphasize the closing of the frontier alone as the cause of the crisis, without bringing in the entire colonial arrangement and its unraveling after the First World War into the picture, will simply not do.
The Theory of Monopoly Capitalism
The transition to monopoly capitalism as the cause of the crisis, which Baran and Sweezy have theorized, is a powerful argument that needs a longer discussion. This explanation, which belongs to the Kaleckian tradition, figured prominently in the work of Josef Steindl, and Baran and Sweezy followed his lead.
One of the major arguments that they derived from Steindl was that innovations, which were always seen in the Keynesian and Kaleckian traditions as stimulating investment, did not do so under monopoly capitalism. This is because an oligopolistic firm, introducing, say, a new process, and undertaking additional investment, in addition to what the overall growth of the market would have warranted anyway, would have to find room for the additional products generated by such extra investment. And it would have to do so at the expense of its rivals. Snatching markets away from the rivals, however, is not easy under oligopolistic conditions, even when these rivals have introduced no new processes: any price cutting to sell more by the innovator might lead to a price war, to everyone’s detriment. And any extra sales effort, which is also typically matched by such effort by rivals, can alter market shares, if at all, only over a prolonged period of time. Hence, in oligopolistic conditions, innovations only alter the form that investment, which would have occurred anyway, takes; they do not add to the magnitude of investment.
If this is one implication of the transition to monopoly capitalism, the other implication, which
is equally profound, is that it entails a shift in income distribution from the workers, the petty producers, and the small capitalists (who tend to get squeezed out by the large oligopolistic firms) toward these oligopolistic firms. Since the propensity to consume (to use a Keynesian term) at the margin is greater for the losers from this income distribution shift than for the gainers, this, ceteris paribus, generates a tendency toward a shrinking of demand and hence overproduction. This tendency, of course, is ex ante, which can be kept in check if the level of investment, or of autonomous demand generally, increases for some other reason arising from the transition to monopoly capitalism. But as we have just discussed, precisely the opposite happens because of this transition, through a reduction in the effect of innovations upon the magnitude of investment.
The transition to monopoly capitalism, therefore, is associated with a tendency toward overproduction and hence stagnation. What is more, when monopoly capitalism comes into being, it is not just a once-and-for-all shift in income distribution in favor of the oligopolists that occurs at the moment of its genesis, but a continuous shift that characterizes it, a tendency toward “an increasing share of the economic surplus.” Hence, this tendency toward stagnation is continuously strengthened.
What may keep this tendency from getting realized, according to them, that is, what may prevent the ex ante tendency toward overproduction from becoming ex post overproduction, is (other than state expenditure and sales effort) the emergence of “epoch-making innovations.” Unlike the usual run of innovations, they argue, these innovations cause additional investment to be undertaken, whose product does not have to be accommodated at the expense of the rivals through price cuts. This is precisely because they are “epoch-making.”
Automobiles constituted an “epoch-making” innovation at the beginning of the twentieth century and kept up aggregate demand despite the onset of monopoly capitalism. In other words, the boost to aggregate demand caused by the introduction and spread of automobiles kept at bay the stagnationist tendency that monopoly capitalism brings in its wake. But, with the end of the automobile boom and in the absence of any new stimulus such as what state expenditure was to provide after the Second World War, this stagnationist tendency, together with its second-order effects, asserted itself through the Great Depression.
Of course non-military state expenditure was increased during the New Deal, with the United States becoming the first country to adopt what one may call “Keynesian policies” independent of militarism. But the opposition of big business to state activism in “demand management” made the Roosevelt administration withdraw quickly from its activist stance. The recovery that the New Deal brought about was accordingly short-lived, and the United States plunged once more into a recession in 1937 owing to the withdrawal of the fiscal stimulus. Final recovery was only to come as the country prepared for the Second World War in response to the fascist threat.
Baran and Sweezy do not consider colonial markets as an exogenous stimulus of note, so that their discussion is limited to innovations and state expenditure as the only possible ways of overcoming ex ante overproduction. That they do not consider colonial markets as an exogenous stimulus is not because they are unaware of the historical significance of the colonies but because of a theoretical proposition they subscribe to, which derives from Kalecki but misses an important fact about colonialism. And this proposition goes as follows.
Consider the macroeconomic identity Y=C+I+G+X-M. Let C = C(Y); let G be a given magnitude and let It = Dt-1 where D refers to investment decisions. Investment decisions taken in the previous period, in other words, cause investment expenditure in the current period, so that the investment expenditure in the current period can be taken to be a given sum. The only way that aggregate demand can be raised in this case (except through larger government expenditure) is through a larger export surplus, not larger exports as such.
Colonial markets, it follows, would have played a role in boosting aggregate demand in the capitalist metropolis, only if export surpluses were made to such markets from the metropolis, a proposition explicitly advanced by Kalecki.4 But because historically export surpluses from the metropolis to the colonies were nonexistent, and the direction of the export surplus was the very opposite of it, as we have seen, the role of colonial markets does not have much significance according to this reasoning.
But the role of colonial markets lay not in boosting aggregate demand in this general sense, but rather in providing an exogenous stimulus for investment. Investment expenditure, in other words, did not depend only upon the profit-rate or the rate of capacity utilization and the like, which had prevailed in the previous period (we say “previous period” because of Kalecki’s assumption of a time lag between investment decisions and investment expenditure). It was directly stimulated by the availability of the colonial market that was “on tap,” that is, where sales were more or less guaranteed. A metropolitan economy that had access to colonial markets could never fall into a state of simple reproduction, as Kalecki had argued that a capitalist economy would in the absence of stimuli arising from government expenditure and innovations.
Once we recognize that colonial markets play this role, that they are on a par with government expenditure in providing an exogenous stimulus (the role of innovations in providing an exogenous stimulus is less persuasive), then a stagnationist tendency can in principle be overcome through encroachments into the colonial market. And if it was not in the interwar period, because of which the Great Depression occurred, then the reason must lie in the unraveling of the colonial arrangement, which is what we have been arguing. The point is that the Baran-Sweezy argument, notwithstanding its obvious importance, has to be located within a larger picture relating to the metropolis-colony relationship.
Leadership of the Capitalist World
Charles Kindleberger’s The World in Depression is an impressively detailed and specific study, where he puts forward the idea that capitalism requires for its stable functioning a world leader, and the Great Depression happened because it was a period when the system lacked such a leader.5 It was an expression of the fact that Britain, the declining power, was unable, and the United States, the newly emerging power, was unwilling to assume the role of a world leader. As he put it:
… the 1929 depression was so wide, so deep and so long because the international economic system was rendered unstable by British inability and United States unwillingness to assume responsibility for stabilising it in three particulars: (a) maintaining a relatively open market for distress goods; (b) providing counter-cyclical long-term lending; and (c) discounting in crisis.… The world economic system was unstable unless some country stabilised it, as Britain had done in the nineteenth century and up to 1913. In 1929, the British couldn’t and the United States wouldn’t. When every country turned to protect its national private interest, the world public interest went down the drain, and with it the private interests of all.6
Kindleberger’s observations can scarcely be disputed, but they are incomplete. How can a leader keep its own markets open to others unless it has some mechanism whereby the entry of other countries’ goods into its market does not entail an increase in its own domestic unemployment? And if it allows access to its market to other countries in order to alleviate their distress, then its indebtedness must increase. How can a leader afford to keep getting increasingly mired in debt? In short, the leadership role in the capitalist world can be exercised by a country not because it is benevolent or full of goodwill as Kindleberger’s remarks may be misconstrued to mean, but because it has power. And this power must have at least two components: first, an ability to generate an “exogenous” market for its goods (from outside its own domestic capitalist economy proper) so that it does not sink into deeper Depression while trying to save other distressed economies; and second, it must have an ability to absorb other countries’ goods, either without getting into greater debt itself, or with the capacity to withstand the burden of grea
ter debt in case it does get into greater debt.
The leadership role, in other words, has to do with how a country is positioned within the world economy and of the balance of class forces within it. Britain could play this role at the time it did because colonialism allowed Britain to possess the requisite power for this role in both the senses mentioned above. Because of the existence of the colonial market “on tap” it could keep its own market open to the entry of goods from other metropolitan capitalist countries, without experiencing a net contraction of aggregate demand for its goods. Likewise, it could enlarge the purchasing power available to the newly industrializing countries through capital exports because it drained away the surplus of the colonies to finance such capital exports. Britain’s leadership role was thus made possible because its colonial possessions gave it the power to play this role. And when the markets provided by colonies got exhausted or encroached upon, either by another newly emerging power, such as Japan, or by the emerging domestic bourgeoisies in the colonies themselves, Britain ceased to be able to play this role any longer.
