by Utsa Patnaik
The inflation in the early ’70s, he argues, was because of a resource crisis, that is, excess demand pressures with regard to resource availability. The crisis was overcome, according to him, through supply adjustments such as oil strikes in the North Sea and the Gulf of Mexico, and the entry of new land into cultivation. This is essentially a Ricardian explanation (though without bringing in the question of “diminishing returns” and secular shifts in terms of trade).
The inadequacy of this explanation is evident from the fact that the crisis of resource shortage of the 1970s was not universally overcome through supply adjustment. In the case of the most vital primary commodity for instance, food grains, it was overcome through a severe compression of demand, and this was achieved through the imposition of an income deflation upon large masses of the population of the world. Globalization of finance, which was responsible for ushering in the neoliberal regime, played the role of imposing this income deflation.
An income deflation, it is often not recognized, has an effect analogous to that of what Keynes had called a profit inflation in eliminating excess demand. While profit inflation does so by raising prices relative to money incomes, an income deflation does so by squeezing money incomes relative to prices. Hence “inflation control” can always be achieved through an income deflation that brings about the same effect as profit inflation would have done, but in a different way. But whereas the two have the same consequence by way of eliminating excess demand, an income deflation is preferred by finance capital since it does not cause a fall in the real value of financial assets. The hegemony of finance in the world economy therefore meant a switch to income deflation, which was imposed through the neoliberal regime that the world moved into with the collapse of dirigisme.
The methods of income deflation, especially in the third world, were obvious: cuts in subsidies; cuts in transfer payments to the poor; cuts in government expenditure that reduced both welfare spending and employment; privatization of essential services, which, though it raises the effective price paid by the poor, is not captured by typical price indices; the reduction in private demand for other goods owing to the privatization of essential services; and so on. In short, the entire gamut of measures that constitute neoliberal policies have this one overwhelming characteristic, of squeezing the demand for goods on the part of the working people from the income side rather than from the price side. And it is this squeeze rather than any supply adjustment that ended the 1970s inflation in primary commodity prices.
Because of this income deflation, the supply side also suffers. In other words, income deflation, while squeezing the demand side, also squeezes the supply side, since the victims of such deflation include the peasants and petty producers as well. But the squeeze on the demand side is greater than any squeeze on the supply side, which, after all, is how it overcomes the problem of excess demand.
According to the Food and Agricultural Organization (FAO), the average annual world cereal output during the triennium 1979–81 was 1,573 million tons for a population (for the midyear of the triennium) of 4,435 million. For the triennium 1999–2001, the cereal output had increased to 2,084 million tons for a world population (again for the midyear 2000) of 6,071 million. This represents a decline in per capita cereal output of the world, from 355 kilograms in 1980 to 343 kilograms in 2000. In other words, far from there being a supply adjustment, there was actually a decline in the per capita cereal output of the world. Since the income elasticity of demand for cereals is certainly positive if we take both direct and indirect demand for cereals (the latter through processed foods and through feed for animals whose products are then consumed), that is, if we take the final demand for cereals as well as the input demand in the Leontief (input-output) sense, there should have been an excess demand for cereals causing a rise in their prices relative to the vector of money wages and money incomes.
This should also have caused a shift in the terms of trade between cereals and manufactured goods in favor of the former, since manufactured goods prices are typically fixed on a prime cost-plus basis, and the rate of growth of labor productivity was much higher in manufacturing than in cereal production. Ironically, we find a decline in the terms of trade for cereals vis-à-vis manufacturing in the world economy that was as high as 45 percent over these two decades.4 In other words, excess demand pressures that would have arisen in the cereal markets were nullified without causing any profit inflation through the imposition of an income deflation, which was so sharp that the terms of trade actually moved in a direction opposite to what one would have expected.
An Echo of Colonialism
The colonial regime, as we have seen, imposed income deflation upon the working people of the colonies and semi-colonies of the third world. The income deflation that neoliberalism has imposed is a replication of this colonial phenomenon. The mechanisms through which income deflation is imposed in the two periods are obviously different: in the colonial period the mechanism was a mix of drain and deindustrialization. In the neoliberal era the mechanism is through public expenditure cuts, some degree of deindustrialization in the sense of traditional activities being replaced by those under the aegis of multinational corporations, such as Walmart replacing a host of retail traders, and also a winding up of the institutional support system by the state that had been developed for peasant agriculture and other petty producers like handloom weavers, which lowers their incomes. At any rate, colonial-style drain of surplus is no longer possible, though some transfers from the third world to the metropolitan countries continue. But income deflation is imposed nonetheless.
We shall look at the implications of the neoliberal regime in detail in the next chapter. But two points about it need to be noted here. First, the dirigiste period had seen an attempt to build an alternative structure, under the influence of Keynesian ideas, which was an alternative to the colonial structure, with state intervention boosting aggregate demand. This, however, suffered from a major lacuna: there was nothing to replace the inflation-controlling role of the colonial regime, which is why inflation flared up in the early 1970s. Neoliberalism entails a partial rectification of this, by instituting income deflation, as in the colonial times, but in a new form, so that a mechanism for inflation control of the sort that had existed earlier is re-created. Neoliberalism, in short, represents a reassertion of imperialism.
But precisely because this reassertion occurs without any necessary armed intervention, through the “peaceful” operation of the market, it is not recognized as such. We have seen that many who recognize imperialism as a phenomenon during the dirigiste period because of the several instances of armed intervention against third world governments attempting economic decolonization, do not do so in the current period when such instances of armed intervention have become comparatively more scarce (except in specific regions).5 This is an error. The earlier interventions occurred because imperialism was being challenged and was generally in retreat. The absence of such interventions today testifies to the triumph of imperialism: income deflation can be imposed on third world populations through governments compelled to do so by the logic of being caught in the web of neoliberalism.
Second, because neoliberalism represents the hegemony of international finance capital, which frowns upon state intervention in demand management, it has no mechanism for stimulating demand in the metropolitan capitalist economy. Colonial markets are now clearly inadequate, and the state is no longer allowed to stimulate demand directly. The only means through which demand can be stimulated in metropolitan capitalism today is through the formation of asset price bubbles.
To put it differently, the colonial arrangement constituted an ideal situation for capitalism. The failure of Keynesianism, which fulfilled one role of colonialism but not the others, showed that capitalism could not function for any length of time in its absence. Neoliberalism fulfills the role of colonialism that Keynesianism could not, but in the process it fails to fulfill the role that Keynesianism had don
e.
Neoliberalism tries to re-create some features of colonialism, namely income deflation on the working people of the third world, with a view to stabilizing capitalism, and does succeed in this regard. In the process, it exposes capitalism to another kind of structural crisis arising from the side of demand, which we will soon examine.
PART 5
CHAPTER 17
The Neoliberal Regime
Neoliberalism is usually presented in terms of a state versus market dichotomy. Ironically, this is often accepted even by its critics who see the core of neoliberalism as consisting in “liberalization, privatization, and globalization,” with the first of the three being interpreted as a “retreat of the state.” This, however, is totally misleading. Neoliberalism entails not a retreat or a withdrawal of the state, not a shift from a regime of state intervention to a regime of “leaving things to the market,” which is the way that neoliberalism would like to present itself, but rather as a change in the nature of state intervention. Underlying it is a change in the nature of the state itself, which in turn reflects a change in the nature of the classes and the correlation between them. A better way of approaching neoliberalism is not through its symptoms but through its class character.
The essence of neoliberalism consists in a dual change that comes about in a capitalist economy: a change in the class configuration and an accompanying change in the nature of the state and its modus operandi. Lenin had discussed in his Imperialism, following the lead of Hobson and Hilferding, how within each metropolitan country a financial oligarchy comes up with the emergence of monopoly, which presides over a mass of finance capital that represents a fusion between industrial and bank capital, and which wants as large an economic territory as possible to steal a march over its rivals. Contemporary globalization implies, in contrast, that within each country, not just in metropolitan countries but in others as well, there is a financial oligarchy, or what we would prefer to call a corporate-financial oligarchy, which is globalized, in the sense of going all over the world in quest of gains instead of seeking an exclusive economic territory of its own.
There are at least three differences between the oligarchy discussed by Lenin and the oligarchy today. First, it is not a specific nation-based, and nation-state aided entity engaged in a rivalry with other similar nation-based and nation-state aided entities, but a globalized entity whose “national” character recedes to the background. As this happens for all such entities, instead of a rivalry among them, we have a certain fusion of these different entities into a common being. This common being is what we have called international finance capital.
Second, international finance capital contributes toward a muting of “inter-imperialist rivalry,” which had been the focus of Lenin’s attention. International finance capital is averse to a world partitioned into different spheres of influence, for that impedes its free movement across the globe.
Third, free movement is not just for setting up industries, let alone for promoting some “national interest” against the “national interest” of others. It does, of course, set up industries if they can be profitably run in some locations. But, above all, its quest for gain takes the form of seeking speculative gains. Speculation occupies center stage in the current era of globalization. This does not mean that we cannot distinguish capital-inproduction from capital-as-finance, the latter obviously roaming all over the world in search of speculative gains. What it means is that there is no Chinese wall separating the two. The multinational corporations that are supposedly the custodians of capital-in-production also engage in speculative activities, as do the dealers in capital-as-finance. And the dealers in capital-as-finance also engage in financing productive activities as do the custodians of capital-in-production.
Within each capitalist economy, the distinction between the corporate-financial oligarchy and the rest, consisting of smaller capitalists, petty producers, peasants, and craftsmen, becomes sharper, with the former getting globalized in its operations and hence getting integrated into international finance capital.
The specificity of this development would become clear if we contrast it with what had happened in a number of third world countries in the immediate aftermath of decolonization. The bourgeoisie in these countries, including the big bourgeoisie, which had been thwarted in its ambitions in the colonial period, had demanded and obtained from the new post-colonial state protection against metropolitan capital. Not only were these economies cordoned off from free capital flows, but they were protected against the free flows of goods and services, so that the big bourgeoisie could carve out for itself a space where it could fulfill its ambition without worrying about any encroachment by metropolitan capital. Third world dirigisme had been a weapon used by the local big bourgeoisie against metropolitan capital. But the use of this weapon had also benefited a host of petty producers, peasants, and craftsmen who had also been protected from encroachment by metropolitan capital.
The dirigiste regime had thus been a carryover of the anti-colonial struggle. And the big bourgeoisie engaged in manufacturing (called the “national bourgeoisie” in contrast to the “comprador bourgeoisie” engaged in colonial trade), which had been a part of the anti-colonial struggle and in leadership of it in countries where the Communists or similar left formations were not leading it, continued even after decolonization to remain in the camp of the working people against metropolitan capital, though with its own motivations and ambitions.
What we find under neoliberalism is a shift in its position. It now makes common cause with metropolitan capital to “open up” the world for free flows of capital and of goods and services, to the detriment of vast sections of peasants and petty producers, and even small capitalists. The hiatus that existed earlier between the “national economy” and metropolitan capital now shifts its location to within the country, between international finance capital with which the domestic big bourgeoisie gets integrated and the rest of the economy, which suffers in terms of output and employment because of the “opening up” to free flows of capital and goods and services.
The second change that occurs is the change in the nature of state intervention. Since the nation-state cannot afford to offend international finance capital (for fear of creating a financial crisis through capital outflows in the event of its doing so), the state intervenes almost exclusively at the behest of such globalized capital. Instead of appearing to stand above classes and playing the role of a detached and benevolent umpire, which the bourgeois state had traditionally tried to do, it now intervenes in the interests of globalized capital in general and its local counterpart, the domestic corporate-financial oligarchy, under the pretense that the interests of this oligarchy is coterminous with the interests of the nation. A notion of “development” is adopted for this purpose, so that anyone opposed to such intervention in favor of the corporate-financial oligarchy is branded as “anti-development” and hence ipso facto “anti-national.”
Rudolf Hilferding noted how in the era of finance capital the nation’s interests are proclaimed to be identical with the interests of finance capital, whereby, he concluded, a glorification of the “national idea” had become the ideology of finance capital.1 But Hilferding’s perception referred to the era of nation-based finance capital. What happens in the current era of globalization is that the promotion of the interests of international finance capital, including of metropolitan capital, which constitutes its largest component, gets justified by a glorification of the “national idea” within the third world, in a remarkable inversion of the logic of anti-colonialism.
How this ideological inversion manages to acquire domestic support is a matter we shall come to later. But the point to note here is that within the neoliberal regime where the state intervenes in favor of globalized capital, it simultaneously withdraws the support it had extended to peasants, petty producers, craftsmen, and small capitalists, plunging these classes, especially the peasants and petty producers, into a deep crisis, as
they cannot withstand the encroachment by the domestic corporate-financial oligarchy, and of international capital generally.
The essence of globalization lies in this basic change that comes about, of which the privatization of essential services; the handing over of publicly owned assets to big private capital, whether to the domestic corporate-financial oligarchy or to metropolitan capital; the running down of price-support schemes for the peasantry that had been erected earlier; the cutbacks in public investment caused by the curbing of the fiscal deficit (to within 3 percent of GDP and no longer zero as under the gold standard) while taxes on the rich cannot be raised, for that too undermines the “confidence of the investors”; and the opening of the economy to free flows of goods and services and capital (though absolute freedom has not yet been accorded to the last of these in all countries) are just manifestations.
Implications of Neoliberalism
This basic shift in class configuration and the policy changes it gives rise to have profound implications. An implication that has received much attention is the shift of capital from the high-wage economies of the advanced capitalist world to the low-wage economies of the Global South. This constitutes a sharp contrast with historical experience. Throughout the period before the current globalization, capital flows from the Global North were essentially toward other countries within the North, to the temperate regions of European settlement to which migration was occurring on a massive scale. The migration of capital was complementary to the migration of European labor.2 Capital that came to the South went to spheres like minerals, plantations, and trade, which complemented the colonial-style division of labor.3
