Under the Gold Standard the values of different currencies were fixed in terms of gold, which meant that the exchange rates between those currencies were fixed. Exchange rate movements therefore could not be used to enlarge net exports and hence domestic employment. At the same time governments were committed to the principle of “sound finance”, a commitment that lasted well into the Great Depression of the thirties; this meant that they insisted upon balancing budgets, which ruled out the possibility of State intervention through fiscal means for enlarging domestic employment. Since consumption expenditure depends upon the level of activity in the economy and investment expenditure upon the “state of confidence” of the capitalists, in the entire period spanning the late nineteenth and early twentieth centuries, capitalism did not have any internal economic mechanism for deliberately stimulating domestic employment. This according to John Maynard Keynes was a major cause for the competitive struggle among capitalist powers for annexing external markets, and hence of wars between them.
Keynes, however, was wrong on this score, not on his economic theory but on his facts. The late nineteenth and early twentieth centuries were a period of relative peace in the history of capitalism. And that is because the competitive struggle for markets was muted by the fact that Britain, the leading capitalist power of the time, had access to colonial markets and in turn allowed access to its own market to rival capitalist powers. In other words, Britain directly, and the other colonial powers indirectly, through Britain, had access to colonial markets, among which of course India occupied a key position. It is this access that played an important role in sustaining the Long Boom of the Long Nineteenth Century (i.e. of the entire period between the mid-nineteenth century and the first world war).
But Keynes was right on his economic theory. In the absence of colonial markets, the combination of “sound finance” and fixed exchange rates would have robbed capitalist countries of any means of enlarging domestic employment, and hence, at the first pause in economic expansion, saddled them with growing and massive unemployment.
Deeper into the Abyss
This excursus into history is instructive, because curiously and paradoxically, the contemporary world economy is beginning to resemble this late nineteenth century and early twentieth century scenario, with two additional facts thrown in: first, the prop of colonial markets is no longer available to the capitalist powers, not so much because of juridical decolonisation as the fact that the scale of succour that “colonial” markets can provide now is too small relative to needs; and second, the pause in economic expansion, indeed a veritable crisis in the capitalist world, is actually upon us. Capitalism therefore currently lacks any means of pulling itself out of the crisis and growing unemployment (it can hope at best for some new “bubble” which again will be only of a transient nature).
This may appear odd at first sight since Keynes thought he had provided capitalism precisely with such a mechanism for overcoming crises, namely State intervention in demand management in the domestic economy. But Keynes, as will be argued below, seriously underestimated the “spontaneity” of the system. This “spontaneity”, this self-drivenness, brooks no interference from any entity that is ontologically located “outside” the immanent logic of the system, and hence in the context of the present crisis, pushes the system ever deeper into the abyss, ever deeper towards self-destruction. The recent happenings in Greece and the rest of Southern Europe are only a manifestation of this.
To be sure, this drive towards self-destruction does not lead to an automatic breakdown of the system. Capitalism does not collapse; it has to be overthrown through praxis, in which the Left and the progressive forces have to play a leading role. But this praxis has to be informed by a correct reading of the world situation, especially of the world economy.
Let us see how the two conditions set out by Keynes are fulfilled today. The first relates to exchange rates. Among the major powers in the world economy the exchange rates are more or less fixed as of now, not de jure as under the Gold Standard, but de facto for a variety of practical reasons. The “emerging market economies” led by China are of course highly competitive in the world economy, since they combine near-subsistence wages (arising from their being the locations for the world’s labour reserves) with access to technology in a number of spheres which entails high levels of labour productivity.
Precisely because of the competitiveness of the EMEs, however, the rest of the capitalist world is collectively doomed to significant current account deficits on the balance of payments. But major world currencies, which are in a regime of “managed float”, cannot afford to depreciate against those of the EMEs, since much of the world’s wealth is held in them and any such depreciation will entail significant capital losses for the world’s rich, not to mention the “distress” to international finance capital. Let alone any actual depreciation, even the fear of a depreciation can cause acute instability in the world of capitalist finance.
Besides, since Japan has substantial foreign exchange reserves (notwithstanding its large public debt), Germany a substantial current account surplus, and the U.S a currency that is considered to be “as good as gold” and hence a reliable medium of wealth-holding all over the world (notwithstanding the massive current account deficit of the US), there are no immediate prospects of any spontaneous depreciation in their currencies.
Euro-Zone: Soft Underbelly
For a variety of reasons therefore we are for all practical purposes at present in a world of fixed exchange rates. But ensconced within this de facto regime of fixed exchange rates among the major world economies, there is a de jure fixed exchange rate regime (indeed a single currency regime) within the Euro-Zone. Now, the de facto fixed exchange rate regime involving the major world currencies is associated, as we have seen, with major world imbalances, with the EMEs together (and China in particular) having a large current surplus, and the rest of world (and the US in particular) having a correspondingly large current deficit. The impact of this imbalance is felt with extreme acuteness on the less competitive economies of the de jure fixed exchange rate area, namely the Euro-Zone. Since within the Euro-Zone, Germany remains strongly competitive, because of its comparatively low rate of wage growth, the travails of these less competitive Euro-Zone economies are even greater. They constitute the soft underbelly of the world capitalist economy.
Any crisis of deficiency of aggregate demand falls with particular severity upon them, since they are comparatively less competitive in the world market. And they can neither “depreciate their currencies”, being part of the single-currency Euro-Zone, nor use the State to stimulate demand by fiscal means and thereby boost domestic activity and employment. Indeed let alone stimulating demand through fiscal intervention, they can not even ameliorate the distress caused to their people because of the crisis, through the “normal” “safety-net” measures that Social Democratic States provide, because the increase in fiscal deficit caused by even this is not acceptable to finance capital (even assuming that the 3 per cent fiscal deficit limit of the Maastricht Treaty could be suitably relaxed). Under the hegemony of finance capital, the working people in these countries must be made to experience massive unemployment, cuts in social security, cuts in wages and salaries (which are supposed to make these economies competitive), and increases in indirect taxes (since direct taxes on the rich, including in particular taxes on property which Michael Kalecki had considered the most appropriate form of taxation, are “unthinkable”).
But the crisis as it is unfolding in the soft underbelly of the advanced capitalist world, i.e. Southern Europe, is not confined to that region alone; nor is it just a “European phenomenon” (though of course Europe’s being a single currency area prevents both the possibility of any exchange rate depreciation and the prospects of any jettisoning of “sound finance”). Their crisis suggests and portends a more pervasive problem that currently afflicts the capitalist world.
State Intervention and Globalized Finance
When John Maynard Keynes had argued for State intervention as the means to overcome deficiency of aggregate demand (since the world, he felt, could not tolerate for long the levels of unemployment prevailing at the time), he had obviously seen the State as an “outside” entity, free of the encumbrances which the functioning of the market system placed upon its (private) participants. Archimedes, who had known the principle of the mechanical Lever, is said to have remarked: “Give me a place to stand and I shall move the earth”; the State, in Keynes’s perception, had such an Archimedean “place to stand”. It remained outside of the capitalist economy and hence could in principle stabilise it and rectify its deficiencies. It was in short placed ontologically outside the capitalist market economy.
Criticisms of the Keynesian position from the Left have typically concentrated upon the fact that the State is not an autonomous entity but has a class character. This would define the limit to its intervention for stabilising the capitalist economy (e.g. it could never achieve real full employment, since a capitalist economy could not function in the absence of a reserve army of labour whose size had to be large enough not just to maintain discipline but also to keep down wage demands); it would also influence the manner in which the State intervenes (e.g. through increased military spending, since that way it does not tread on the toes of private capitalists in any sphere). In short, even the Left critique of Keynes’ optimism regarding the achievement of full employment under capitalism never questioned his perception about the State being ontologically located outside the capitalist market economy, and being on a footing altogether different from that of all market participants.
With globalisation of finance however even this perception has to be abandoned. Of course, even this fact, namely that this perception has to be abandoned in the era of globalisation, at least for all States other than that of the leader of the capitalist world, the United States, has been recognised in the past. But the argument for it has been advanced along the lines that any action of a nation-State that runs contrary to the whims and caprices of globalised finance will attract a capital flight from the economy concerned which makes the State conform to these caprices and hence precludes Keynesian interventionism. But the argument against the Keynesian perception is even stronger.
Loss of State Sovereignty
Globalised finance can militate against Keynesian-style State interventionism not just by fleeing the country in the event of the State being intransigent. It can do worse. It can simply prevent the State from borrowing. It can undermine the “confidence” in the State. It can have the State declared un-creditworthy through the simple expedient of getting the so-called credit-rating agencies, they of the “sub-prime” notoriety who have once more crept back into respectability and indeed into the powerful position of being arbiters of the destinies of sovereign States, to say so. The naïve may think that one should not cavil at Greece with 13 per cent fiscal deficit (as percent of GDP) being declared un-creditworthy; but even they would be hard put to explain why Estonia with 6 per cent fiscal deficit should suffer the same fate.
The point however is not the rationale of the credit-rating agencies’ activities; nor is it a moral tirade against globalised finance. The point simply is that in the era of globalisation, where neo-liberal policies have been fully carried out, where the Central Bank has become autonomous of State control (or has simply disappeared into the European Central Bank as in the case of Greece), and where the State has to depend upon international financial markets for raising loans to undertake its expenditure, it has ceased to be ontologically outside the market system. It has ceased to be any different from other market participants. It can no longer, even conceptually, let alone sociologically, have the power to rectify the failings of the market, since it is itself a part of the market. It can no more rectify the market than any normal capitalist participant tut-tutting about the crisis can, since it has no higher status than any such participant. Its debt may be called “sovereign debt” but it is in no sense a “sovereign State”, as the Greeks are learning the hard way. The State in short has lost its “place to stand” a la Archimedes, from where it can move the system.
Inversion of Democracy
The fact that this loss of “sovereignty” on the part of the State is the obverse of the process of globalisation of finance capital, which by that very process lays claim to this very “sovereignty”, the fact that the loss of “sovereignty” on the part of one is the acquisition of a new kind of “sovereignty” by the other, is too obvious to need repetition. And so is the fact of the complete inversion of democracy. Democracy means a State responsive to the needs of the people, a State accountable to the people, a State that derives its legitimacy, at least in principle, from its responsiveness to the people. But a State that is but a market participant, a State that must account for itself before the financial interests, a State that, whether it likes it or not, has to squeeze the people to satisfy financial interests represents a fundamental negation of democracy.
It is as if the people and finance capital have simply swapped places vis-à-vis the State. It is as if there has been an inversion whereby that which was to be controlled is doing the controlling, and that which is supposed to have been doing the controlling is instead being controlled. The example of Greece, where the degree to which the people have to be squeezed has to be worked out by the State to the satisfaction of finance capital, amply demonstrates the point. And all this is done not through some coup d’état, or some backroom manouevre, or some invisible skullduggery. It is done in open day-light as an apparently perfectly legitimate activity that must be accepted as a part of the functioning of the system, while those opposing it are called irrational and unreasonable. The reification introduced by the hegemony of finance is complete.
One cannot but be thankful for the steadfast stand of the Left, the trade unions, and progressive forces in India that has prevented this process from being carried to completion in our country. But the neo-liberal crowd has not abandoned its efforts, which is hardly surprising since behind these efforts stands international finance capital. Even recently a Commission on Financial Reforms set up by the Planning Commission (what business the Planning Commission has in the matter is itself a mystery) under the chairmanship of Raghuram Rajan, a former chief economist of the IMF, has recommended throwing open the market for government bonds in India to international investors! If this is accepted then the Indian government too will become a mere plaything in the hands of credit-rating agencies which are sensitive to the moods of international finance capital. These moves must be fought tooth and nail.
Removal of State Support
But the most significant consequence in the immediate context of the State being reduced to a mere market participant is something quite different. When the capitalist crisis broke with the collapse of Lehman Brothers, fiscal intervention by the State in a number of capitalist countries prevented the worst from happening. The States ran up massive fiscal deficits both to bail out their financial systems and to put floors to the levels of activity in their respective economies. The total amounts involved in such bail-outs of course were usually much more than those explicitly provided for in the budgets, since they included all kinds of guarantees and supports; in the US for instance the total bail-out package for the financial system is estimated to have been around 13 trillion dollars which was massively in excess of budgetary provisions. Nonetheless, whether through the budgets or outside of the budgets, State support had succeeded in putting a restriction on the magnitude of the crisis.
What we are witnessing now however is a concerted effort to remove at least a part of that support. This is bound to aggravate the crisis by removing the boost to the level of activity. If the State cannot maintain its fiscal stimulus, if the State’s credit rating gets downgraded if it sustains a fiscal stimulus, then deflationary measures become inevitable. And such measures have a domino effect. If such measures are imposed in, say, Southern Europe or in Britain, then it has a depressing effect on the level of activity in some other countries as well, which in turn increases, even without any explicit attempt at fiscally stimulating the economies to counter such effects, the fiscal deficits in these economies (since ceteris paribus their tax revenues go down). This in turn has the effect of downgrading the credit rating of these economies and so on. With pressure mounting on the US government to cut back its fiscal deficit, even though the US is not, and is unlikely to be in the foreseeable future, subject to any such downgrading, the capitalist crisis which had appeared to have been stemmed, is likely to get further accentuated in the coming months.
Why, it may be asked, is capitalism exhibiting this immanent tendency towards self-destruction, where even the prop that had sustained it during the crisis is being sought to be removed? The answer lies partly in the fact that capitalism is not a planned system; its movement depends upon its immanent tendencies which impart to it a spontaneity, even a spontaneity that may push it in the direction of self-destruction. International finance capital’s resistance to the abandonment of “sound finance” is a part of this spontaneity, even though such “sound finance” can push the economy into deeper crisis. But a part of the answer also lies in the fact that a global capitalist State that could conceivably have imposed its writ on globalised finance is absent today. The US which comes closest to being a surrogate world capitalist State is itself a highly indebted economy, running a perennial current account deficit that cannot be offset by encroachments on the colonial markets and extractions of colonial surpluses, as had happened in the case of Britain earlier. That is why as world capitalism appears to go downhill, there is no force strong enough to stop this movement.
Prabhat Patnaik is at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. This article was first published in the 6 June 2010 issue of People’s Democracy, the Communist Party of India (Marxist) Weekly; it is reproduced here for non-profit educational purposes.