by Utsa Patnaik
The state that is supposed to pursue such policies, however, happens to be a nation-state. For it to have such autonomy, not only must it not be a prisoner of finance capital, but it also should be able to pursue policies that are not necessarily to the liking of finance capital. For this it is necessary that cross-border flows of finance must be restricted, for, if finance is international and can move across national boundaries at will, then the nation-state’s writ cannot run against it, as it would simply quit the country en masse, precipitating a crisis. Keynes, we saw earlier, had expressed this idea in an article in The Yale Review in 1933, even before The General Theory had been written, where he had said, “… above all, let finance be primarily national.”1
The Bretton Woods system that was set up in 1944 gave expression to this idea. It was a regime where controls were imposed by the nation-states over cross-border capital flows, including above all the cross-border flows of finance, so that the state could intervene in demand management to push economies closer to full employment.
But even if demand could be “managed” by the state, there still remained a problem relating to the balance of payments. Moving close to full employment could still be thwarted by the emergence of a current account deficit on the balance of payments that was unsustainable. Of course, since the deficits of all countries taken together must add up to zero, if the surplus countries could expand their domestic demand, if not through an increase in domestic employment (for they are likely to be close to full employment anyway) then at least through an increase in domestic consumption at that given level of employment, then the deficit countries could automatically get rid of their deficits without having to curtail their domestic activity.
The Bretton Woods arrangement, however, could not institute such adjustment on the part of surplus countries. The United States, then a surplus country, opposed any provision that would force adjustment upon surplus countries to get rid of their surpluses. Under the Bretton Woods system, therefore, it was only the deficit countries that were obliged to carry out adjustment. And they were allowed a whole range of instruments for this purpose, from exchange rate depreciations to tariffs and quantitative restrictions. Exchange rate depreciations, of course, would be of no avail if they were followed by retaliation by other countries. To prevent such retaliation and hence to curtail the absolute rights of countries to undertake depreciations, the Bretton Woods system insisted that these could be effected only with the permission of the IMF. It was, in short, a fixed nominal exchange rate system with capital and trade controls (and hence a system of multiple effective exchange rates) where the nominal rate could be adjusted with the permission of the IMF. And within this system, nation-states could undertake demand management measures.
Though Keynes was no means the sole or even the principal author of this arrangement (the U.S. representative at Bretton Woods, Harry White, had a powerful role), an inkling of its theoretical underpinnings can be obtained from certain remarks of Keynes in The General Theory. Holding that a “competitive struggle for markets” as a cause of wars “probably played a predominant part in the nineteenth century,” he wrote that under the system of domestic laissez faire and an international gold standard, which prevailed, there were no means available to governments other than a competitive struggle to reduce domestic unemployment.
Keynes, as we have seen, was factually wrong. The latter half of the nineteenth century was a period remarkably free of wars over markets (since Britain kept its markets open to its rivals and yet kept up its aggregate demand and managed to balance its payments through the control it exercised over its colonies). Indeed, between the Crimean War and the First World War, the only wars between European powers were over the German and Italian unifications, and these were not, primarily, struggles for markets. But what concerns us here is his theoretical position, namely that a regime of balanced budgets and fixed exchange rates leaves no scope for any internal mechanism for increasing employment. What the Bretton Woods system did was to negate both. Budgets did not have to be balanced, for which control over financial flows was necessary, and exchange rates became subject to adjustment.
Contradictions of the Dirigiste Arrangement
Colonialism had been ideal from the point of view of capitalism, because not only did the colonies provide a market via the replacement of local craft production, but also because the same act of destruction released raw materials for capitalist use. The act of finding a market, in short, was simultaneously an act of income deflation in the colonies through the destruction of local crafts (supplemented, of course, by income deflation through the “drain” effected by the taxation system). Inflationary pressures were thus kept at bay in the metropolis even while metropolitan capitalism got itself a market. The two requirements of capitalism, for finding markets and for imposing an income deflation in the outlying regions to ward off the threat of increasing supply price, were both achieved at one stroke.
But when state expenditure creates a market, it does not thereby release any raw materials in the way that the market obtained through the destruction of colonial crafts had done. The two moments, of finding a market and of obtaining supplies of raw materials, which are subject to increasing supply price, are now no longer woven into each other. If state expenditure provides the market, then it is necessary in some other way to impose income deflation on the third world raw material users, so that increasing supply price does not come into play, threatening the value of money in the metropolis. But within the postwar dirigiste arrangement, there was no such “other way,” which left the system perennially vulnerable to inflation.
This vulnerability was quite distinct from the vulnerability to inflation arising from the high level of employment, which Joan Robinson’s “inflationary barrier” had emphasized and which actually went back to Marx’s proposition that the existence of a certain reserve army of labor was an essential condition for the viability of capitalism.
Marx’s proposition has been usually interpreted to mean that if the reserve army fell below a certain relative size vis-à-vis the active army, then the trade unions would become strong enough to demand and obtain real wages relative to labor productivity, which would squeeze the rate of profit to levels that would threaten the survival of the system. (This is not the only reason for the existence of a reserve army according to Marx; the imposition of work-discipline, which capitalism achieves through coercion upon the workers, becomes impossible in the absence of a reserve army into whose ranks the workers from the active army can be pushed as punishment for “indiscipline.”)
Marx’s argument actually related proximately to money-wage movements, but, since in his schema money-wage and real wage movements always went together, as he was talking about a commodity money system, the argument can be interpreted as referring to either. If we talk, however, of a paper money or credit money system, then a fall in the relative size of the reserve army of labor would raise money wages, exactly as Marx had argued, though instead of increasing real wages, higher money wages would get “passed on” in the form of higher prices. Marx’s proposition about the system depending upon the existence of a minimum relative size of the reserve army of labor therefore has a wider validity beyond the commodity-money world that he was specifically talking about, which Joan Robinson’s 1956 concept of an “inflationary barrier” brought out later.2
But even if a reserve army of adequate size is maintained and there is stability in money wages, as the economy grows it would require larger and larger amounts of raw materials, a part of which has to come from the tropical landmass. Since the supply price of this part is increasing, it would jeopardize the value of money in the metropolis either directly or indirectly, via jeopardizing the value of money in the periphery, which would then control its exports to the metropolis. Even with given money wages all around, therefore, there would be a threat to the value of money. Because of this, the imposition of income deflation on input producers and input users in the periphery becom
es necessary, even if the state through its expenditure provides adequate markets for the capitalist products in the metropolis. The postwar dirigiste arrangement did not have any mechanism for imposing such income deflation.
The Consequences of the Absence of Drain
Deindustrialization had not been the only mechanism for income deflation in the periphery. The drain of surplus was also an important mechanism for achieving the same end, so that the value of money in the metropolis did not get undermined by the phenomenon of increasing supply price. Political decolonization, which brought the drain to an end, removed ipso facto a powerful instrument of income deflation. To be sure, other ways of surplus transfer from the periphery continued, such as through unequal exchange,3 or through payment for intellectual property rights to metropolitan capital. However, the politically imposed transfers, such as through the colonial taxation system, came to an end, which regenerated the possibility of inflation and hence the threat to the value of money.
There is yet an additional powerful implication of the elimination of the colonial drain. In the colonial period Britain, the leading capitalist country, kept its own market open for the newly industrializing countries of that time. Had it not done so, the system of the gold standard would have been difficult to sustain because of the struggles for markets among the rival capitalist countries, and the world capitalist economy would have run into a crisis much earlier than it did. In fact, keeping its market open for encroachment by newly industrializing countries is an important hallmark of a world capitalist leader at all times.
Britain, however, managed to avoid getting into any balance of payments problems because of the drain from the colonies. Suppose it did not have access to the drain, then it would have got into debt with countries running a current account surplus vis-à-vis itself. The drain, in other words, prevented an outpouring of IOUs by Britain.
In the post–Second World War period, since political decolonization forecloses the possibility of a drain, the leading capitalist country of this time, the United States, which had to keep its markets open to others as part of its leadership role, has increasingly gone into debt. (This “openness” was being revoked under Donald Trump, an issue we discuss later.) In the absence of the drain, in other words, the world has had to hold on to a continuous outpouring of IOUs by the United States, making it, paradoxically, the most indebted country in the world. The most powerful capitalist country in the world being the most highly indebted represents an unprecedented situation in the history of world capitalism. But this only reflects another unprecedented situation, namely that we have for the first time the leading capitalist country not having access (to a degree that covers its current account deficit on the balance of payments) to a drain of surplus from an empire.
This has two obvious implications. The first is the fragility it lends to the global financial system. This is an obvious and much discussed point and need not be labored any further. The second is that the IOUs of the leading country provide the base for an enormous growth of a financial superstructure.
While this growth in the financial superstructure has been a remarkable fact in the postwar period, and some have even coined a new term, “financialization,” to describe it, what is often not appreciated is that financialization owes not a little to the phenomenon of the absence of the drain of surplus from the periphery into the leading capitalist power.
To be sure, even if there had been a drain of surplus from the periphery, it still might not have sufficed to prevent a rise in the outpouring of IOUs from the leading capitalist power, so that some “financialization” might still have been inevitable. But financialization certainly would not have proceeded at the pace it has if the leading capitalist country had access to a substantial drain of surplus from the periphery. Financialization, in short, is the other side of the coin to the absence of a substantial “drain of surplus” from the periphery to the metropolis as had occurred in the colonial period.
With the outpouring of IOUs from the leading capitalist country to the rest of the world, the question arises: How is the value of the leading country’s currency, not just vis-à-vis the currencies of other capitalist countries, but also with respect to the world of commodities, preserved?
The Bretton Woods system sought to resolve this problem in a purely formal way by officially decreeing the U.S. dollar to be “as good as gold” and by fixing its price in terms of gold at $35 per ounce of gold. Such a system, however, could remain viable only if there was no rush to actually convert dollars into gold, but it obviously could not survive if there was such a rush. Since the printing of dollars was unrelated to the magnitude of gold that actually happened to be in the possession of the central bank of the leading capitalist country, gold convertibility of the dollar could clearly not be sustained, if ever it was seriously challenged.
The presumption behind the Bretton Woods arrangement was that it would not be challenged because of an implicit understanding between the major capitalist countries, that is, the sheer power relationship between the advanced countries will keep the system going. But clearly if the outpouring of dollars reached massive proportions (an issue we will examine later), the system could not last. This is precisely what happened in the early 1970s, leading first to the suspension of dollar convertibility in 1971, and then the abandonment of the Bretton Woods arrangement altogether in 1973.
To sum up, the basic weakness of the postwar dirigiste arrangement lay in that it sought to erect an international monetary system without the underpinning of colonialism, as the gold standard had. The absence of the colonial prop manifested itself in two ways: first, the absence of any mechanism for income deflation meant that inflation arising from increasing supply price and threatening the value of money could not be kept at bay; and second, the absence of colonial drain meant that the debt of the leading capitalist country piled up, causing a massive expansion in the financial superstructure and making the system particularly vulnerable and fragile. The collapse of the Bretton Woods system and with it of Keynesian demand management was the inevitable result, which only underscored that capitalism could not function without either a direct colonial prop or some arrangement that could produce a similar effect as a colonial prop.
Putting it differently, two of the concessions that postwar capitalism had given, namely political decolonization on the one hand and Keynesian demand management on the other, were mutually contradictory. This would become clear only over time. During the time the contradiction did not erupt (for reasons we shall discuss later), the system functioned exceedingly well, to produce what has been called the “Golden Age of Capitalism.” But this “Golden Age” was essentially an aberration, something that was intrinsically incapable of being sustained.
Contradictions of Third World Dirigisme
Dirigiste regimes also came into existence in most third world countries in the wake of decolonization. Though these regimes differed from one another in important ways, as we shall see, they all had one point in common, namely to use the state, including a public sector, against the domination by metropolitan capital that had been their legacy. Public sector enterprises were started to develop and process natural resources, to develop infrastructure, and to plug gaps in the production structure, especially with regard to basic and producer goods industries. Since the domestic capitalist class had been relatively weak and underdeveloped to start with, with little interest in undertaking any research and development, the public sector also became the means for developing whatever limited technological self-reliance that third world countries managed to achieve.
Breaking out of the colonial pattern of international division of labor, through embarking on a process of industrialization, required protecting the home market from the entry of metropolitan products. The dirigiste regimes therefore set up tariff barriers and quantitative trade restrictions, behind which “import-substituting” industrialization could proceed. But since the technology for such industrialization remained lar
gely in the hands of metropolitan capital, collaboration with such capital became necessary for the domestic bourgeoisie, so that joint ventures involving domestic and foreign capital became the order of the day, and came up behind tariff walls. Thus, protectionism necessarily also meant protecting metropolitan capital that had jumped the protectionist walls to locate production units within the country through joint ventures.
Protectionism, however, only enabled domestic producers, whether in the public or in the private sector, to capture a larger chunk of the home market; it could not by itself give rise to larger growth over time. The dynamics of the system depended upon the rate at which the home market itself was expanding, especially since breaking into export markets for units that developed under the dirigiste regime behind protectionist walls was extremely difficult (unless metropolitan capital permitted it, which, except in the case of a few countries in East Asia in that period, close to the United States and supportive of its war against the Vietnamese, was scarcely on the cards).
One very important factor affecting the growth of the home market was the rate of growth of agriculture. And while all over the third world the growth rate of agriculture picked up compared to the colonial period, there were major constraints upon this growth arising from the degree of land concentration.
We must distinguish here between three distinct cases. The first is where the Communists had led the anti-colonial struggle; decolonization here was followed by radical land redistribution (followed in most cases by the formation of cooperatives and collectives). The second case is where the land had been substantially taken over by colonialists earlier, as in the case of the Japanese colonies; here, the U.S. occupation forces at the end of the war carried out land redistribution at the expense of the Japanese landlords. The third case is where neither of the above two situations obtained; decolonization in these remaining cases was not followed by any radical land redistribution so that the rural power structure did not change sufficiently to encourage investment by smaller peasants. (Zimbabwe was one important exception to this, though it carried out land redistribution not immediately following decolonization but at a much later date.)
