by Utsa Patnaik
The reason for this pusillanimity in carrying out land redistribution is what Lenin had noted in the case of Russia much earlier.4 Where the bourgeoisie comes late to the historical scene, it is afraid that any attack on landed property may rebound into an attack on bourgeois property, and thus makes common cause with the landed interests in defending private property, even though this entails arresting the democratic revolution in the country. Therefore, the dirigiste regimes that came up in countries where the bourgeoisie, or proto-bourgeois elements, had played a leading role in the anti-colonial struggle invariably eschewed any radical land redistribution.
This is not to say that in this third group of countries, which constituted the majority of the countries of the third world, the nature of landownership remained completely unchanged. Many feudal or semi-feudal landlords, those who were not interested in turning to capitalist farming in the new situation, sold their land to rich tenants who now came to constitute a proto-capitalist kulak class. A tendency toward capitalist agriculture containing an admixture of landlord and peasant capitalism emerged in these countries. But, while the composition of the top landowning group thus underwent a change, the extent of land concentration did not diminish; a vast mass of pauperized peasants and agricultural laborers with little or no land continued to exist as before, despite decolonization.
At the same time, agriculture was protected and promoted in various ways under the dirigiste regime by the new post-colonial state: through subsidized inputs; tariffs and quantitative trade restrictions; provision of cheap credit; provision of assured remunerative prices; public investment in irrigation and infrastructure; research and development under the aegis of the government for developing better seeds and better agricultural practices; and public extension services for disseminating information about better practices. The main beneficiaries of these measures no doubt were the better-off peasants and landlords turning to capitalist farming; but compared to the colonial period, agricultural growth picked up.
What was striking about the new third world dirigiste regime is that though it did not break land concentration and allowed the eviction of tenants for the resumption of land for capitalist farming by the earlier landlords (which constitutes one kind of primitive accumulation of capital), it did insulate agriculture from encroachment by domestic and foreign monopoly capitalists, and thereby prevented primitive accumulation of the other, classic kind.
Though the growth rate of agriculture picked up in these countries, it nonetheless limited the growth of the domestic market, especially because of the unequal distribution of income that accompanied such growth across the agriculture-dependent population. The constraint upon industrialization arising from this source continued to plague the dirigiste regime.
The other major source of the growth of the domestic market was the growth of state expenditure, which created greater employment opportunities in the traditional bureaucracy, in the “development bureaucracy,” and in the public sector, for large numbers of middle-class youth. Michal Kalecki had coined the term “intermediate regimes” to describe this phe-nomenon.5 He saw the urban middle class and the rich peasants who had a similar “intermediate” social position to this middle class in the countryside as constituting the main social support–base for regimes that were characterized by a policy mix of state capitalism (public sector) and non-alignment (in foreign policy), and which obtained aid from both the Soviet Union and the advanced capitalist countries, using the former to drive a better bargain with the latter. What Kalecki’s analysis misses, even if we go along with his characterization, is the contradictions of these regimes.
The basic contradiction of such regimes, notwithstanding their substantial achievements, is that the growth in state expenditure, which is the main source of the dynamics of the system (given the inadequate stimulus from agricultural growth owing to the absence of land redistribution), cannot be sustained because the state gets gradually engulfed in a fiscal crisis. This is because the competing claims upon the state budget from the bourgeois and proto-bourgeois elements, and from the emerging rural capitalists drawn from the ranks of both landlords and rich peasants, cannot be reconciled, except either through inflation at the expense of the workers, agricultural laborers, and middle-class employees, or through a curtailment of state spending, or, typically, a mixture of the two.6
The dirigiste regimes that came up in the postwar years had much to their credit. They sustained rates of economic growth which were quite unprecedented, both in the advanced and in the underdeveloped countries, by their respective historical standards. But they represented essentially a passing phase, a transitional arrangement that could not be sustained for long. They represented an attempt to control capitalism, but “controlled capitalism” could not withstand the “spontaneity” of this mode of production.
CHAPTER 15
The Long Postwar Boom
The postwar economic regimes in advanced capitalist economies that involved state intervention in demand management overcame one particular problem that had arisen with the end of the prop of colonialism, namely the problem of deficiency of aggregate demand, of which the Great Depression had been a clear manifestation. However, they did not contain any mechanisms for overcoming the other problem, namely the tendency toward inflation that could arise in the event of demand outrunning raw material availability, and also, more generally, because of increasing supply price. And, of course, demand stimulation by the state to raise employment also opened up the possibility that the reserve army of labor could dwindle to a point where inflation could arise from the side of the labor market, as Joan Robinson’s idea of an “inflationary barrier” had anticipated.
If, despite these obvious hurdles that could stifle a state expenditure–stimulated boom, postwar capitalism nonetheless enjoyed a prolonged boom more pronounced than any boom ever experienced in its entire history over a comparable period of time, which has made many call this period the “Golden Age of Capitalism,” then the reasons for it need careful investigation. This is what we do in the present chapter. But first, let us look briefly at the nature of the boom itself. The facts about this boom are well known, though the interpretations differ; we will therefore focus more on interpretations, and, more generally, the theoretical perspectives.
State Intervention in Demand Management
State intervention in demand management through larger government expenditure took the form of military spending in the United States, which is why some have called this policy “military Keynesianism.”1 The United States came out of the Great Depression essentially through larger military expenditure in the run-up to the Second World War. Germany and Japan, which had begun the militarization drive earlier, had overcome the Depression earlier as well, Japan being the first country to do so. The finance minister in the early 1930s, Takahashi, had been murdered for wanting a halt to further militarization once the “slack” associated with the Depression had been exhausted. The liberal capitalist countries, notably the United States, had followed suit only in the late 1930s.
The United States continued with a large military budget even after the war for a number of reasons: first, because it was a convenient way of preventing a slide back into recession, which, in the new context of the socialist challenge, would also have been politically inexpedient; second, because military expenditure has the “advantage” that it does not entail encroaching upon the sphere of activity of private capital and hence does not arouse any opposition on that count; and third, because military expenditure neither increases the standard of living of the workers, which would strengthen their bargaining strength vis-à-vis the capitalists, generating anger among the latter, nor adds to capacity as investment does. If it did add to capacity, then it would create problems of capacity utilization in the future, and require that the state, if it is to avoid such unutilized capacity and hence the onset of a recession, must keep increasing its investment expenditure and piling up capacity in a meaningless spiral, as the
Russian economist Mikhail Tugan-Baranovsky had visualized.2
But it was not just a question of keeping up the level of aggregate demand. The share of government expenditure increased as a proportion of GDP in the United States during the 1950s and 1960s. This increase, which was part and parcel of an increase in the share of economic surplus in the GDP, has been interpreted differently by different authors.
Baran and Sweezy, following their own earlier separate works that had argued along similar lines, suggested that there was an ex ante tendency for the share of surplus to increase, because the rate of growth of labor productivity tended to exceed the rate of growth of real wages, which meant that there was also an ex ante tendency toward overproduction, since wage-earners’ propensity to consume was higher than of those to whom the surplus accrued. Overproduction, however, was kept in check by growing government expenditure, especially military expenditure.3
Nicholas Kaldor, reviewing Baran’s book, contested this claim of a tendency for the share of economic surplus to rise on the grounds that there was no sign of any secular increase in the share of post-tax profits in GDP.4 If there had been an ex ante tendency for the surplus to increase, and its effect by way of generating overproduction had been kept at bay through state expenditure financed by a fiscal deficit, then we would have certainly seen the share of (post-tax) profits in GDP increasing over time. Since there was no sign of this, Kaldor would have had a point in claiming that Baran’s premise of a rise in the share of surplus was wrong, provided the overproduction-offsetting expenditure had been financed by a fiscal deficit.
But from an observed ex post constancy in the share of (post-tax) profits in GDP, we cannot reject the claim of an increase in the ex ante share of surplus, as Kaldor does, for two obvious reasons. First, if growing government expenditure is financed by a tax on profits, then all three phenomena can simultaneously occur, namely a rise in the ex ante share of surplus, growing government expenditure (which means a rise in the observed ex post share of surplus), and a constancy in the ratio of post-tax profits in GDP. An observed constancy in the share of post-tax profits therefore does not constitute a refutation of Baran and Sweezy’s argument.
Second, since surplus also includes the post-tax wages of “unproductive workers,” apart from total post-tax profits and all tax revenues accruing to the state, an increase in such wages, associated for instance with a rise in the costs of circulation, could reflect a rise in the share of surplus (both ex ante and ex post), even if neither the share of government tax revenue nor the share of post-tax profits in GDP increase over time. Since Baran and Sweezy’s argument also focused on a rise in costs of circulation and on growing government expenditure relative to GDP financed not by a growing ratio of fiscal deficit but by growing taxes, including on capitalists, they were clearly immune to Kaldor’s criticism for this reason as well.
Nonetheless, a question does remain over Baran and Sweezy’s argument. Suppose there is no tendency for the share of surplus to rise ex ante but the government increases its expenditure relative to GDP by taxing workers, with the tax share on profits remaining unchanged and the distribution of income between pretax wages and pretax profits remaining unchanged. In this case, there would have been no increase in the ex ante share of surplus, but only an increase in the ex post share of surplus. We cannot infer from an observed increase in the ex post share of surplus that there is also an increase in the ex ante share as well. The latter has to be independently and separately established.
One may think that looking at the ratio of pretax profits to pretax wages in GDP would be an obvious way of establishing an ex ante tendency for the share of surplus in GDP to rise. Even this, however, is inadequate: at any given level of capacity utilization, if the government raises its expenditure and finances it by taxing profits, and if the capitalists squeeze wages in order to make up for the higher taxes they have to pay, then there would be a higher share of pretax profits (at the expense of pretax wages) in output, but it would not have been caused by any ex ante tendency for the share of surplus to rise as Baran and Sweezy had envisaged. Hence, the Baran-Sweezy argument requires a more careful marshalling of evidence than just looking at a few ratios.
But no matter what view we have on the question of an increase in the ex ante share of surplus, there can be little doubt that capitalism in the period of postwar dirigisme saw an increase in the ex post share of surplus in output in the United States and in the capitalist world as a whole. In other words, whether the increase in the share of government expenditure in output and of the costs of circulation warded off a tendency toward overproduction that was immanent in an increase in the ex ante share of surplus, it did occur, so that the share of post-tax wages of the productive workers in total output declined over time.
This assertion would appear to go against the “profit-squeeze” hypothesis that has been put forward by many, including Glyn and Sutcliffe in the context of British capitalism. Quite apart from the statistical issues that have been raised with regard to this hypothesis, namely whether to take depreciation and stock appreciation as part of profit, it should be remembered that we are not discussing the share of wages compared to that of profits, but the share of wages compared to the surplus, much of which accrues to the state.5 As Turner, Jackson, and Wilkinson argued in the context of British capitalism, taxation was a major instrument for squeezing wages; they had even talked of a “wage-tax spiral.”6 Much of the welfare state expenditure undertaken in Europe was financed by taxes on the workers themselves, though obviously not all of that expense was so financed, for then it would have had little demand-stimulating effect, which it undoubtedly had.7
Even if the tax revenue raised from the workers and the capitalists is in exactly the same ratio as the one in which pretax income is distributed among them, and the value of the balanced budget multiplier is unity, larger government expenditure raises the share of ex post surplus in total output. When there is unutilized capacity and unemployment in the economy, it does so via output adjustment. And if the increase in government expenditure relative to base output persists even after “involuntary unemployment” has been overcome, then despite balancing its budget through taxes raised in this manner, the government would be unleashing a process of inflation in terms of the wage unit.
In other words, even the process of overcoming involuntary unemployment through government expenditure financed by equivalent taxation may entail an increase in the share of surplus in total output in the economy. Whether larger government expenditure takes the form of military spending as in the United States, or of welfare state spending under the aegis of Social Democracy as in Europe,8 as long as this enhanced expenditure is met through taxing productive workers to a greater extent than before, it would still entail a rise in the ex post share of economic surplus in total output.9 In other words, the postwar dirigiste regimes, while keeping the advanced capitalist economies close to full employment (but never at actual full employment, since a capitalist economy can never function without a reserve army of labor), effected, at the same time, an increase in the ex post share of economic surplus in GDP.
This now raises an important question: If the unemployment rate is low and yet the share of surplus in output is increasing, then why did the workers not press for higher wages in order to fight against their declining share?
The Question of Working-Class Resistance
Two answers can be given to this question. The first is that inflation below a certain threshold would go unnoticed by the workers, in the sense of not being anticipated and hence not entering into the money-wage bargain.10 This is simply the “money illusion” argument of Keynes in a different guise. Some hypothesis of this sort also underlies the Phillips Curve, which states that workers never anticipate inflation. The first argument says that they do not anticipate inflation below a certain threshold, but it amounts to saying that as long as inflation remains below that threshold the Phillips Curve remains valid. And for a long period whe
n the postwar dirigiste regime was in operation, the rate of inflation, though positive and eroding the share of post-tax wages, was not too high, which makes this hypothesis regarding why workers did not jack up money-wage demands to fight against a declining share of post-tax wages in output a plausible one. Workers fighting against a declining wage share would have meant accelerating inflation.
The second answer is that the United States, to an extent, exported its inflation to other capitalist countries. Traditionally the United States had been a current account surplus economy, which was one reason why it prevented the Bretton Woods system from having any provision for making the surplus countries undertake measures to overcome their current account surpluses. But during the 1950s it set up a string of bases across the world to encircle the Soviet Union in the name of warding off its challenge to capitalism, a challenge that did not exist at all, since having lost 20 million people in the war, the Soviet Union was in no mood to spread socialism beyond what had been achieved by the end of the war, and was criticized on this score by Mao’s China.
The cost of maintaining this string of bases meant that in the course of the 1950s the United States became a current account deficit economy. Expenditure on these bases was met through the budget, and corresponding to the fiscal deficit there developed a current account deficit. The United States simply printed money to meet these deficits, and since under the Bretton Woods system the dollar was “as good as gold,” other countries were obliged to hold on to these dollars.
