There is a very pervasive view that the current capitalist crisis consists exclusively of the financial crisis and, in so far as the financial crisis is now over, the crisis as a whole is over. This, I believe, is erroneous, and this is because, like Bob Brenner, I also believe that the current financial crisis itself is embedded within a deeper structural crisis of capitalism. This structural crisis has no signs of getting over, and as a result what we are going to see now is in fact a fairly protracted crisis, a crisis which one would be quite justified even in calling an impasse as far as capitalism is concerned at this moment. But before that let me try and develop a few things.
The reason you have involuntary unemployment in any economy is because wealth can be held also in the form of money. Imagine a world in which wealth could be held exclusively in the form of capital goods. Then of course there would never be involuntary unemployment. Whatever output is produced at full employment will be partly consumed, corresponding to which there will be demand for that output, and whatever is not consumed . . . would also take the form exclusively of capital goods, and as a result there would never be a problem of aggregate demand. Likewise, even if all wealth were held in the form not of capital goods but of claims on capital goods, even then, as neoclassical economics would argue, there would never be a problem of aggregate demand, and what is called Say’s Law — supply creates its own demand — would always hold. The reason why you have a problem of involuntary unemployment therefore is because a part of the wealth is thought to be held by people in the form of money rather than in the form of either capital goods or claims on capital goods. Both Marx and Keynes said this. But this immediately raises the question: What is the difference then between money and claims on capital goods — which basically means all kinds of financial assets — which lies at the heart of both Marxian and Keynesian theory? Now, Marx . . . was not talking about money exclusively as commodity money, but he was talking about money in a world of commodity money, so I would not really discuss Marx so much as I would discuss Keynes. According to Keynes, there is in fact a view — I mean, Keynes never really answered this question directly, or he gave conflicting answers — that the difference between money and financial assets may appear at first sight to lie in the fact that financial assets represent claims on capital goods which are direct in some sense while money represents claims on capital goods which are mediated through the banking system, so the distinction is only between direct and indirect claims on capital goods, but that is erroneous because of course we know that there are no direct claims on capital goods . . . and as a result even what we call claims on capital goods are themselves mediated through several different layers. There is also a view in Keynes that really the difference lies in the fact that the supply of money is limited . . . but even that is not really a correct answer, for the simple reason that, if that were the case, then of course in a world in which you have endogenous money where money supply adjusts to the demand for it, which is really what modern economy is all about, you would not have a problem of involuntary unemployment according to this view. What then is the distinction between money on the one hand and financial assets on the other? In my view, the fundamental distinction — this can be read into Marx and Keynes — lies in the fact that the value of money in terms of commodities is fixed in the short term while the value of financial assets in terms of commodities is not so fixed. The fact that the value of money in terms of commodities is fixed is of course according to Marx because of the labor theory of value. Even if you do not accept the labor theory of value, Keynes argues that, in the short term, money wages are fixed, which basically means that there is one commodity, labor power, whose value in terms of money is fixed. True, this may change over time, of course money wages change over time, and therefore the value of money in terms of this commodity, labor power, may change over time. But, on the other hand, when that change takes place, a corresponding change takes place in the value of all money-denominated assets in terms of their value, in terms of labor power. So, the basic thing is that, when the value of money in terms of commodities changes, the value of financial assets in terms of commodities also changes, but, when the value of money is fixed, the value of financial assets in terms of money can still change. So, there is a difference fundamentally between money and financial assets which consists in this, and this has very important implications.
Money we always think of as a risk-free asset. Why is it risk-free? Because apparently the value in terms of itself cannot change. But that cannot be really an explanation of its being risk-free because the value of anything in terms of itself does not change. The fact that it is risk-free arises from the fact that in the short term its value in terms of commodities has a degree of fixity, arising in Keynes from the fixity of money wages in the short term, which is not true of all other assets. This of course is itself something which is apparent, which is in fact in a sense a superficial explanation because you can ask: What is it that fixes the value of money in a world of bank money vis-à-vis labor power? What is it that actually ensures that the value of money does not change too much? Essentially, I suppose, here one has to invoke the state: the modern capitalist state does not want hyperinflation, it therefore always tries to control in a sense the value of money in terms of commodities, or what comes to the same thing, the value of commodities in terms of money. Therefore in a sense the value of money, the fact that distinguishes money from all other financial assets, lies in the fact that behind the institutions whose liability is money there stands the state, and it is this which actually in a sense gives money a value in a contemporary modern economy. Now, if this is the case, then of course the level of activity, that is employment and output, in any period — if we assume given money wages, given conditions of production — would depend upon the expected rate of returns on the claims on capital goods net of risk premium. And it so happens that this expected rate of return net of risk premium tends to rise in booms and collapse in slumps. Why does it rise in booms? One can think of at least three explanations. One is that, when the prices of financial assets rise, people have elastic expectations, they expect them to rise further, because of it they rise further, and so on. So, elastic price expectations are one reason why the prices of financial assets — what I call claims on capital goods — in terms of money tend to rise during a boom. The boom tends to be self-sustaining for quite some time until it collapses. The other reason is of course that as the boom lasts, as people like Minsky have argued, people become more used to it and then tend to undervalue the risk that is associated with the boom, that is, associated with these assets. One can think of a third explanation, and the third explanation is that we have financial innovations that tend to camouflage risk, and, in my view, derivatives are one such financial innovation. Derivatives, in my view, fundamentally tend to camouflage risk rather than do anything else, and it is this which allows them to actually sustain the boom for a longer period. But, if that is the view, then it would turn out that, as Bob Brenner was saying, it is not financial innovations which are new, because much of what I am saying appears in the chapter on the trade cycle in Keynes’ General Theory. So, it’s not that financial innovations have done something new, that, by introducing derivatives, they have actually done something fundamentally radically different. True, institutionally, we have a very different description of the world today, but analytically it’s not something which is really doing anything fundamentally different.
Where financialization, or what I would call the emergence of international finance capital of globalized finance, has made a difference lies somewhere else. There is something new in the world today, but what is new is not what is usually proclaimed as new but something quite different, and that, to my mind, lies in the fact that globalized finance, international finance capital, is mainly responsible for pushing on the world a neoliberal regime, in which finance is free to move around, commodities are free to move around, and so on. And the emergence of this neoliberal regime is something which has very important implications.
Let’s just look at these implications. Imagine a world in which commodities move around, finance moves around, capital moves around, freely, across the world. The world is characterized by substantial labor reserves, which exist mainly in Third-World countries like India and China and so on. And, as Marx argued in Volume One of Capital, if you have substantial labor reserves, then that has a tendency to keep wages at some kind of a historically determined subsistence level — not biological subsistence level but historically determined subsistence level. If you have an integrated world with labor reserves that, in countries which have labor reserves, keep wages at a historically determined subsistence level, then that actually puts a downward pressure on wages in the advanced countries as well, because of the fact that you would have an outcompeting of the advanced countries’ products by products produced by the low-wage countries. Therefore typically in such a world you have a tendency for the wage rate to move down in the advanced countries and for labor productivity to move up in the developing countries, in the low-wage countries. Therefore, taking the world economy as a whole, the share of surplus in world output tends to rise. The surplus is, you know, the difference between labor productivity and the wage rate, the surplus per worker. So, if you take the world economy as a whole, there’s a tendency for the surplus to rise. To this is added a second factor, namely technological progress. This tendency of the surplus to rise that I was talking about occurs on the basis of existing technology, simply that products tend to shift, diffusion of activities takes place, from the advanced to the backward countries, because of which their productivity rises, and there’s a downward pressure on wages in the advanced countries, giving rise to a rising surplus. When technological progress takes place, that means we’re not talking about existing technology but new kinds of technology coming. New technologies typically tend to be labor-productivity-increasing, typically tend to raise labor productivity. Imagine the vector of wages in the world is given because of the existence of labor reserves. As a result you find that any technological progress giving rise to an increase in labor productivity has a tendency again to raise the share of surplus in world output. Therefore, for these reasons, in a world in which we have neoliberal policies being pursued everywhere, there would be a tendency for the share of surplus in world output to increase. And, if that is the case, then of course this surplus has to be realized. Then, we are really back in a Baran-and-Sweezy kind of problem of global underconsumptionism: fundamentally, the surplus has to be realized, and there has to be a larger aggregate demand; because the share of wages is going down, if wages are by and large consumed, then of course the share of workers’ consumption is going down; some other share must be rising in order to make sure that this surplus is realized and that the problem of aggregate demand is not actually faced in the world economy as whole.
Now, here I would suggest that bubbles-led growth is something which actually camouflages this problem: that, if you have a bubble, then of course you have a kind of upsurge in demand, and overconsumption based on credit, etc. camouflages the problem. Likewise, when there is a collapse of the bubble, a collapse of overconsumption, that would actually accentuate the problem. But the basic thing is that bubbles and the collapse of bubbles are superimposed on a fundamental structural problem of global underconsumptionism, which arises because of the fact that the share of surplus in the world economy tends to rise in a world economy that is characterized by pervasive neoliberalism.
Now, there is a further problem here: the fact that the share of surplus rises shows itself in terms of a rise in income inequalities across the globe. There is a rise in income inequality in the advanced countries, there is a rise in income inequality in China, in India, even in countries to which activities are shifting because everywhere the share of surplus in total output tends to increase and the share of wages tends to fall. And the rising income inequalities in countries like India and China have a very peculiar implication, and that’s the following: suppose you have a rising surplus in China taking place, and therefore you have a problem of aggregate demand occurring in China; that problem of aggregate demand occurring in China does not manifest itself in China — it manifests itself in the United States; because being a low-wage economy, as the share of the workers’ consumption is declining, the government need do nothing; you simply have export surplus as a proportion of output, to the United States or elsewhere, rising. In other words, low-wage countries would not face a problem of aggregate demand because any ex ante tendency for the problem of aggregate demand being faced by them would manifest itself as a problem not in their countries but in the United States or elsewhere in the high-wage countries. Therefore China would not face a problem of aggregate demand; China would always have the ex ante problem of aggregate demand manifesting itself as a current account surplus because being a low-wage economy it can push out exports to the world market, outcompeting other producers. Correspondingly, however, again a manifestation of this neoliberal world economy is that countries like the United States, no matter what they do, would always be faced with a problem of a current account deficit. Their problem of a current account deficit arises, to start with, because of the problem of the rise in the share of surplus in total output in countries like China and India. So, that manifests itself as a current account surplus for China and India and correspondingly therefore as a current account deficit in countries like the United States, in high-wage countries. In other words, structurally, increasing inequalities, an increasing share of surplus in output, and a current account deficit as far as the leading capitalist country, the United States, is concerned is something which is a feature of the current times.
Now, this implies that a country like the United States would find it very difficult to be, as it were, the world leader in providing injection to the level of world aggregate demand. We don’t have a world state. We don’t have a world state to pursue Keynesian demand management policies. But some people may argue that we have a surrogate world state in the United States which is the leading capitalist country of our times and that can in fact inject demand to be what they call the locomotive of the world economy, but its capacity to continue being the locomotive is something which is undermined by the fact that it is intrinsically always being faced with a rising current account deficit and therefore getting increasingly indebted. Therefore we have a world today in which there are growing inequalities and in which there is a growing problem therefore of realization of surplus value and in which there is a growing current account surplus for the low-wage countries and a current account deficit for the United States, because of which the leading role of the United States gets undermined.
You may recollect that one of the problems which Charles Kindleberger, an MIT economist, had highlighted as underlying the Great Depression of the 1930s is the fact that there was no leader of the capitalist world. Britain was no longer capable of providing leadership, and the United States was not yet willing to provide leadership. Today we live in a world where of course it is becoming increasingly difficult for the United States to provide leadership and there is nobody else on the horizon who can even provide leadership.
As it is, we are really in the midst of a fairly serious structural crisis. Let us look at this crisis briefly in a slightly different way, putting it in a historical context. . . . And that context is the following: if you look at periods of growth in capitalism, the entire period from the middle of the nineteenth century right until the First World War was a period of the gold standard and the British leadership. Now, Britain had a current account deficit systematically — like the US has today vis-à-vis China and so on — vis-à-vis continental Europe and subsequently vis-à-vis the United States, in other words, the newly industrializing countries of that period. Vis-à-vis such countries Britain had a current account deficit. How did Britain resolve that current account deficit? It resolved it by having a current account surplus vis-à-vis colonies like India or semi-colonies like China. And countries like India in turn had a current account surplus vis-à-vis continental Europe and the United States to whom they sold primary commodities. As a result you had a triangular trade mechanism whereby the current account deficit of the leading capitalist country could be overcome. Not only was it not indebted, but it actually became the biggest capital exporter of that period. And how was that possible? Because of the current account surplus which Britain had vis-à-vis countries like India and so on, the current account surplus due to selling textiles at the expense of pre-capitalist producers, at the expense of handloom weavers and so on, who actually got dispossessed, unemployed, and decimated, giving rise to the modern problem of mass poverty. But Britain, because it had a colonial relationship, could do it: it extracted a substantial surplus on the grounds that it was a quid pro quo for its providing good administration, with which it could then make capital export. The colonial relation enabled the leading capitalist country of that time to actually continue to provide leadership to the capitalist world without getting indebted. Not so today. Today we live in a different kind of world, where the United States, which is the leading capitalist country, cannot settle its current account deficit vis-à-vis somebody else, because the old colonial relationship of the kind that existed in the pre-First World War period is over. In fact, one can argue that the reason for the Great Depression of the 1930s is that the old mechanism — which actually kept the system going and was the basis for a prolonged boom in capitalism from around the middle of the nineteenth century till the First World War — could not keep going. As a result we had a depression. (In the post-war period, we of course had the state playing such a role.)
Today, again, we have a situation where, on the one hand, pressures of international finance capital, which is opposed to fiscal deficits and so on (I mean there’s all this talk about withdrawal of stimulus in this country itself), on every other state have actually more or less sabotaged Keynesian demand management elsewhere. In the eurozone, a 3% fiscal deficit is all that you are allowed. . . . In India, too, we have got a Fiscal Responsibility Act talking about 3% as the ceiling for the fiscal deficit. So, there is pressure, because finance is opposed to state intervention of any kind, except in its own interest. So, you have a situation where there is a prevention of Keynesian demand management policies under pressure from finance. That pressure does not of course operate for a country like the United States, which is large, powerful, and can withstand that pressure. But the United States is itself hamstrung by the fact that it is getting continuously indebted. As a result we have a situation where a basic mechanism for sustaining the world capitalist economy’s boom is missing. Looking at it differently, you have a situation where of course bubbles-led growth and collapse-of-bubbles-caused recessions are always superimposed on some basic underlying trend, and that underlying trend makes itself felt by the fact that these slumps tend to be short-lived because some independent growth factors that are there make sure that a slump is short-lived and through that we have a positive trend, but today that kind of independent factor — whether it is state activism (which, by other states, is not possible and which, even by the United States, is limited) or selling to colonial countries — is not available. Therefore we are in the midst of a kind of impasse, and that impasse is going to be aggravated by a factor which is the last one I am going to talk about, and that’s the following: you have a period of dirigisme in the post-Second World War years, during which the state in a lot of Third-World countries played a major role in supporting petty producers, peasants, and so on. The peasants had been decimated by the Great Depression of the 1930s, so the decolonization drive, the anti-colonial struggle, basically promised the peasantry and promised the petty producers that it would defend them, and it did defend them in the post-colonial period. The post-colonial state played a role in protecting peasants and petty producers from the vicissitudes of the world market. But under neoliberalism that is gone, because of which you find that the peasants and petty producers are facing an acute problem as far as many of these countries are concerned. In India, 200,000 peasants have committed suicide, because they simply cannot cope with the neoliberal situation, with policies flowing from the neoliberal situation. Typically, capitalism has always sustained itself on the basis of political support from small producers. The Paris Commune collapsed because Thiers got support of the peasantry, on the argument that an attack on capitalist property would be followed by an attack on petty property. To the extent that a rupture is taking place between the capitalists on the one hand and the petty producers on the other, that is also going to be politically very significant for the fortunes of capitalism. In other words we are now in a situation where as I said there is an impasse that capitalism is facing. This is not to say that it is going to collapse, but this is just to say that there is an impasse which is pregnant with all kinds of historical possibilities. It is certainly not a situation where we can say the crisis is over.
Prabhat Patnaik, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. This lecture was delivered at the panel on “Derivatives & the Capitalist Crisis: What’s New?” at the Rethinking Capitalism conference held at the University of California, Santa Cruz, on 8 April 2010. The text above is an edited partial transcript of the lecture.