by Utsa Patnaik
To be sure, behind the formal acceptance of the dollar to be “as good as gold” there was the real acceptance of the fact that the U.S. bases against the Soviet Union were meant to serve not just U.S. interests but the interests of the entire capitalist world. The other capitalist countries accepted the outpouring of dollars not because of a piece of paper signed at Bretton Woods declaring the dollar to be “as good as gold” but because the United States was the undisputed leader of the capitalist world. And they accepted for the same reason the outflow of dollars from the United States even when some of these printed dollars were being used for taking over European factories and other assets.
There was some breast-beating in Europe over this, specifically over the unwisdom of lending to a country (which is what holding on to its currency means) so that it can use the loans to buy up the assets of the lending country. But little could be done about it. As a result, the torrent of dollars from the United States continued, and these were held by European banks, which wanted to invest them abroad but were prevented from doing so because of the Bretton Woods system that allowed all sovereign countries the right to control capital flows into or out of their economies.
In the absence of the ability of the United States to run these current deficits, it would have to squeeze domestic absorption via a higher rate of inflation compared to what actually occurred for maintaining its overseas bases. Its own rate of inflation, therefore, was moderated because of its ability to run current deficits, which meant, in turn, that elsewhere the pressure of demand, and hence the rate of inflation, was higher than it would ceteris paribus have been otherwise. The United States thus exported to an extent its inflation to other countries.
To summarize the picture that obtained during the so-called Golden Age, U.S. militarism kept up demand both within the country and elsewhere. It kept up demand elsewhere in two distinct ways: one was by virtue of the fact that a high level of demand within the United States props up other economies; the other was because the United States ran a current account deficit, which meant that other countries, forced to run a corresponding current account surplus, found their aggregate demand to be even higher than their domestic circumstances warranted. They too used government expenditure to boost their domestic economies, and in Europe’s case through substantial welfare expenditure under the aegis of social democracy. But their domestic boost to aggregate demand was bolstered by U.S. militarism.
Since this meant high levels of employment and capacity utilization, it called forth significant private investment and hence high rates of economic growth. As a direct consequence of economic growth, as the Kaldor-Verdoorn law suggests (that there is a positive relationship between economic growth and growth of labor productivity, with causation running from the former to the latter), and because several innovations that had not been introduced during the Depression could now be introduced in boom conditions, advanced capitalist economies witnessed high rates of labor productivity growth. And in a situation of low unemployment and hence strong bargaining power of trade unions, that meant high rates of real wage growth. With unemployment low and real wages growing rapidly, the working class in the advanced capitalist countries witnessed an improvement in its living standards that was quite unparalleled in the history of capitalism.
Even so, the share of post-tax wages in total output was declining during this period, with a corresponding increase in the share of economic surplus. This would normally be expected to cause strong money-wage demands, leading to accelerating inflation, but inflation remained both low and non-accelerating, with no signs of any wage explosion until 1968 (on which more later), because the lowness of this inflation rate prevented its being taken into reckoning. Besides, it always takes time for workers to take stock of their cumulative losses. Put differently, the significant absolute improvement in the conditions of the workers prevented them from becoming agitated over their loss of shares in relative terms. This was a situation that was bound to come to an end sooner or later, as it actually did. But while it lasted, it kept the “Golden Age” going.
But what about the other source of inflationary pressures, namely primary commodity prices? Let us turn to this issue now.
Terms of Trade vis-à-vis Primary Commodities
Many economists, notably W. Arthur Lewis,11 had predicted after the Second World War that there would be a rapid increase in raw material prices in the years to come. But far from this happening, raw material prices after the Korean War boom fell relative to manufactured goods prices, and that too when the overall rate of inflation was low. Between 1952 and 1971, there was a 23 percent drop in the prices of all primary commodities relative to manufactures; if we take non-oil primary commodities the drop was 26 percent.
Also remarkable is that almost the entire drop in the terms of trade of primary commodities vis-à-vis manufactures occurred prior to the notable acceleration in inflation that happened in the advanced capitalist countries with the wage explosion of 1968, which one would expect to turn the terms of trade against primary commodities. Paradoxically, in the period 1967–72, there was hardly any movement in the terms of trade in either direction, but in the period 1951–67, there had been a secular movement in favor of manufactures while the fact of the protracted boom, together with the rapid growth of labor productivity in manufacturing, would have suggested the opposite, as economists like Lewis had also anticipated.
The terms of trade movement is not difficult to explain. Economic surplus as a proportion of gross value added in the advanced countries increased during the 1950s and ’60s. Capitalists producing manufactured goods typically charge a price that is a mark up over the unit prime cost. The state further imposes an indirect tax mark up on this price. The rise in the profit-cum-indirect tax margin, which raises the share of surplus in the gross value of output, is likely to entail a decline not only in the share of predirect-tax wages in gross value of output but also in the share of primary commodity producers. And despite this decline for primary producers the share of pretax wages in gross value added too can still go down, as indeed happened.12 Hence, the adverse terms of trade movement for primary producers is also a part of the rise in the share of surplus.
But the real question is, how did this happen while the rate of inflation remained relatively low? This is contrary to what would be expected since the phenomenon of increasing supply price in primary production, if nothing else, should have caused an acceleration of inflation owing to the persistence of the boom. Even over 1960–73, toward the latter part of which inflation had become quite pronounced, the average inflation rate for twenty-one OECD countries was just 4 percent. In particular when income deflation through the mechanisms of the colonial period could no longer be imposed upon the third world, how is it that the phenomenon of increasing supply price did not make itself felt through a primary commodity price explosion?
Two reasons can be adduced for it. One, we have seen that the phenomenon of increasing supply price could be countered, in the case of commodities produced by the tropical landmass, through land-augmenting measures,13 of which irrigation is the most important (both for its own sake and also for making other land-augmenting measures such as high-yielding seed varieties effective). The colonial administration had undertaken very few land-augmenting measures in the third world. In fact, the Canal Colonies of Punjab were the only major irrigation project undertaken anywhere in the British Empire during the entire colonial period. The post-colonial dirigiste regimes that arose in the third world, however, made it a point to undertake land-augmenting measures. Corresponding to the growing demand in the metropolis for the products of the tropical landmass, there was also a growing supply through land-augmenting measures, which therefore kept the phenomenon of increasing supply price (which occurs only when there is little or no land-augmentation) in abeyance.
Put differently, metropolitan capitalism imposes income deflation on the outlying regions for obtaining supplies of products of the tropical landmass at non-
increasing prices relative to money wages not because such income deflation is inevitable in any sense, but because it is capitalism’s way of obtaining supplies. Capitalism does not want an activist state intervening to raise production via land-augmentation, even within peripheral economies. Under British colonial rule, all government investment had to fetch a minimum rate of return, and the colonial administration always advanced the argument that there was no certainty that investment in land-augmentation would fetch this rate of return.
The reason for income deflation on the producers in the periphery, in other words, was not natural or geographical; it was social. And with the coming into being of post-colonial regimes, this social compulsion disappeared to a great extent. The post-colonial dirigiste regimes had no compunctions about using fiscal resources, including fiscal deficits, to undertake irrigation investment, and more generally to undertaking land augmentation. Per capita agricultural output increased like never before, and this meant that inflation arising from this source was kept in check.
The second reason is that all over the third world the effort on the part of the new regimes was to industrialize, for which these countries required as much foreign exchange as they could possibly lay their hands on. Hence the pressure to sell products of the tropical landmass made many of these countries fight against one another to boost sales. The new producing countries, moreover, were at an advantage since they could initiate price competition and snatch away markets from the existing large producers among such tropical countries who dominated the market but could not engage in price competition without being large-scale losers. Hence, price competition to expand market shares became the order of the day, with new or small sellers taking the lead in cutting prices. Sri Lanka expanded its market shares in the tea market at the expense of India, while Bangladesh did the same in the case of jute textiles. And they did so through price competition.
This increased competition among third world countries was also a factor keeping down the rate of inflation, despite the phenomenon of increasing supply price. The initiation of land augmentation within most third world countries, and the intense competition among them for pushing out more and more primary product exports to obtain the foreign exchange required for industrialization, were the two factors that kept primary commodity prices under control, even in the midst of such a large boom.
This, however, could only provide a temporary palliative. The third world dirigiste regimes got embroiled in fiscal crises over time, since the emerging capitalist and landlord-capitalist strata used the budget as a means of primitive accumulation of capital that included rampant and growing tax evasion. The state therefore could continue the government investment-led growth process only through larger recourse to indirect taxation or deficit financing, both of which imposed an inflationary squeeze on the working people that was politically inexpedient within a framework of parliamentary democracy. Under the circumstances, it cut back on the tempo of public investment, pushing dirigisme into a dead end and holding back on land augmentation.
The Golden Age conjuncture was necessarily a transient one. It could last only as long as the workers in the metropolis did not take note of the rising share of economic surplus in the GDP and did not jack up their money-wage claims to get back lost ground, and also as long as land augmentation could continue in the third world with the dirigiste regime not getting enmeshed in a fiscal crisis. Both of these denouements were bound to occur sooner or later, as indeed they did. But before that happened, capitalism enjoyed a Golden Age not because of itself but despite itself. This was so because dirigisme, both in the metropolis and in the third world, though an essential factor underlying the boom, was anathema for capitalism.
A Perspective on Imperialism
Political decolonization was followed by economic decolonization against which the metropolitan countries fought bitterly, to the point of staging coups d’état against third world governments that dared to take control over their own national resources. The coups against Mossadegh in Iran and Arbenz in Guatemala were among the earliest such efforts, to be followed, prominently, by the coup against Allende in Chile. The fact of military interventions against third world governments in the course of this protracted fight has given the impression that imperialism was a powerful reality in the 1950s and ’60s, and apparently no longer is a reality.
Precisely the opposite is correct. Once imperialism is seen as an arrangement for imposing income deflation on the third world population in order to get their primary commodities without running into the problem of increasing supply price, it is clear that this arrangement had fallen through after political decolonization. The period of the 1950s and ’60s, far from being the heyday of imperialism in a new guise, represents rather a loosening of the imperialist knot, when imperialism could not impose its will on the third world. Imperialism’s aggressiveness in that period reflects its frustration at this inability. As we shall argue in a later chapter, metropolitan capital is in a much stronger position today to impose its will on third world states and third world petty producers than in the Golden Age years. Indeed, in the sense of not having to resort to so many coups, imperialism appears “invisible.”
CHAPTER 16
The End of Postwar Dirigisme
The unraveling of the colonial arrangement, which preceded the various measures of political and economic decolonization, and which, in our view, was a major reason for the Great Depression, had meant that markets were no longer available “on tap” from this source for metropolitan capitalism. Political, and subsequently economic decolonization, meant two further things: first, the drain of resources that had characterized the colonial period and had acquired immense proportions during the Second World War and inflicted upon Bengal a famine that killed three million people was no longer available. This meant that commodities were no longer available gratis to the leading capitalist power, so that playing the leadership role by running a current account deficit with other emerging powers got it deeper and deeper into debt. This is what happened to the postwar leader, the United States.
Second, the income deflation that the drain and the process of deindustrialization had imposed on the colonies and semi-colonies of the third world to prevent the effects of increasing supply price from manifesting themselves in the form of a destabilization of the value of money could now no longer be imposed, which made the system additionally vulnerable.
While state intervention in demand management, which Keynes had advocated and which became a reality after the Second World War, could overcome the problem of deficiency of demand that the unraveling of the colonial arrangement had thrown up, the other two problems mentioned above could not be overcome. The postwar dirigiste regime in the metropolitan capitalist countries remained vulnerable on these two counts. It also remained vulnerable to the possibility of a money-wage explosion, since the share of surplus in GDP was increasing in metropolitan countries during the long boom, even as the unemployment rate came down greatly, to around 2 percent in Britain in the mid-1960s and around 4 percent officially in the United States in the Kennedy years, which greatly strengthened the bargaining position of the workers.
These vulnerabilities did not become apparent immediately. They took time to manifest themselves, giving a false impression that they did not exist at all. But when they did appear, it spelled the end of the postwar boom, the so-called Golden Age of Capitalism, and of the dirigiste regime itself, which was no longer sustainable in the new situation. Let us look at how the different contradictions of the postwar regime played out.
Inflation and the Wage Explosion
Throughout the 1950s and ’60s, the workers, especially the “productive workers,” were losing ground because of the increase in the share of surplus (including costs of circulation) in GDP in the advanced capitalist countries. This was because, apart from the rise in the costs of circulation, there was a significant increase everywhere in the ratio of government expenditure to GDP. Whether this warded off
an independently given tendency toward overproduction or was a sui generis phenomenon, an issue we touched upon earlier, need not enter the discussion here. But its obvious manifestation was that prices rose more rapidly than unit labor costs (taking post direct-tax wages), that is, post–direct tax real wages rose less than labor productivity.
This did not, however, disrupt the boom, and that is because the rate of inflation, itself being small, did not attract notice from the workers, especially since (post–direct tax) real wages were rising rapidly anyway, even if less rapidly than labor productivity. Rapid labor productivity growth was stimulated both by high GDP growth and also by the use of the backlog of un-introduced innovations from the interwar period when the conditions of depression had thwarted their introduction.
The rate of inflation began increasing in the mid-1960s. The reason was that the United States had become a current account deficit country from its earlier status of being a surplus country. The primary reason for this turnaround was the expenditure it incurred in maintaining military bases all over the world. This basically meant that other countries, taken together, were forced to run a current surplus with the United States, which meant, on the one hand, a boost to their aggregate demand coming from this external source, and, on the other, accumulating dollar reserves as payment for this current surplus.
The running of a current account deficit by the United States provided a boost to the process of diffusion of capitalism to other countries, notably in East Asia, which was exactly analogous to the way that Britain’s running of a persistent current deficit with capitalist rivals like Germany and the United States had done in the period before the First World War. The only difference was that Britain’s deficit with rival powers was more than offset by its drain from the colonies. Britain, far from becoming externally indebted, actually became the world’s largest creditor nation at that time, whereas in the case of the United States there was no such drain income, and its current account deficit entailed accumulating external debt (which was paid for under the Bretton Woods system by the export of U.S. dollars).
