No. 53, May 2013
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No. 53, May 2013 |
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No. 53 Why Do Credit Rating Agencies Press India to Reduce Government Spending? The 'Fiscal Deficit' Bogeyman and His Uses Large Corporate Firms on Investment Strike, Playing with Cash Will Cutting the Fiscal Deficit Bring Down Inflation? What Is Missing in the Present Discussion
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What Is Missing in the Present Discussion In our articles on the Budget and related questions of the economy, we have talked about questions such as the ‘fiscal deficit’, ‘demand’, ‘stimulus’, and so on. Since the whole world today is afflicted by recession or stagnation, to one extent or another, these are common topics of discussion in the world today. So what we say inevitably echoes some aspects of such discussion going on around the world. There are broadly two sides in the public debate about the world economy today. A third perspective, though much needed, is today conspicuous by its absence. There is an opposing school of thought, however. This opposing school has been sidelined in policy-making. But it cannot be entirely ignored by the dominant media, if only to keep up some pretence of democratic discussion. This opposing school points out that a nation’s economy is not like that of a household, since one person’s expenditure is another person’s income; so a reduction in the former also means a reduction in the latter, and leads to a downward spiral. Cutting government spending at a time when demand is inadequate will only depress incomes even further. This school punctures the myth that the US government debt is an immediate problem for the US, and points out that the US is borrowing at extremely low interest rates. It argues that the 1930s-style depression being suffered in southern Europe could be avoided if the European Central Bank would relax interest rates and in other ways help the affected countries expand government spending. Commentators of this school point out that in India government spending needs to be increased and interest rates need to be reduced, failing which industrial growth will continue to fall or stagnate, and employment will suffer. Whereas if the government through its spending creates demand for goods, that will trigger investment by the corporate sector, and thus revive industrial growth and employment. The second school effectively exposes the views of the first school. It shows that, apart from causing needless mass suffering even as the financial elite roll in wealth, the dominant view does not make sense even in terms of the traditional benchmark of the capitalist economy, viz., output growth. They believe the solution to the recession, in the form of increased government expenditure, is there for the taking; it is simply the spell of stupid ideas which prevents it being taken. Or alternatively, it is the hijacking of policy-making by a set of dispensable special interests that is standing in the way. Of course, this is not a new debate. It began in the 1930s, when the best-known proponent of the second view was John Maynard Keynes. Despite the vast influence of Keynes’ theory for four decades after he wrote his magnum opus, the dominant view today is the first, and the debate remains essentially the same. Third view Thus it was not merely the extraordinarily high levels of unemployment in the 1930s which created revolutionary ferment in many countries. (Great Depression-like levels of unemployment are being witnessed in countries such as Greece and Spain today.) The capitalist world was haunted by the fact that there was a social system in existence which enjoyed full employment and output growth, while in the capitalist countries workers were laid off while goods lay unsold and grain had to be destroyed for want of demand. “The authoritarian state systems of to-day,” said Keynes (referring to both socialism and fascism) “seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated—and, in my opinion, inevitably associated—with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.” (emphasis added) In the absence of socialism, both as a theoretical argument and even more as an actual State-system, the frame in which different questions are viewed is very limited. All the problems under discussion today – fiscal deficits, paucity of demand, need for a stimulus, etc. – are the products of a system in which a small, even minuscule, section of society controls the means of production and thus the surplus of society. For example, why are fiscal deficits necessary? Because, while there is unemployed labour and idle productive capacity, governments need to expand spending; but for this purpose they cannot afford to tax too heavily those who control the surplus of society, since those gentlemen also control governments. By contrast, in a society in which the means of production and hence the social product are socially owned, full employment is quickly attained. The problem is then one of how much of that social product to allocate to different purposes – to the present and the future; among different regions and sectors; to material needs and to cultural needs. (This decision-making process opens a fresh chapter of social struggle.) Why is there inadequate demand today, which causes capitalists to reduce production and lay off workers? On the one hand, those who produce all the goods and services in the economy are not the source of the problem, since they consume almost all of their incomes, and often incur consumer debt as well. Those who own the means of production (or own the financial claims on them) account for the rest of demand, either in the form of their luxury spending, or, crucially, investment in expanding productive capacity. It is this last type of demand, for investment goods, that is never stable, at times racing, at times collapsing, depending on its expectations of making profits. On the other hand, a socialist society does not have a problem of a general lack of demand (as opposed to lack of demand for particular products); if it did arise, and led to the piling up of unsold goods, it could be eliminated simply by raising the general level of wages. (Since there are always enough customers in socialist society, the problem it faces is one of ensuring adequate supply. While this from time to time may require physical rationing, which is highly visible, capitalist society practices a much more obnoxious, and invisible, rationing according to unequal distribution of purchasing power.) Why is a stimulus, in the form of increased government expenditure, needed to revive the economy? Because those who control the surplus of society may not be convinced at a particular juncture that investing in expanding production would yield them sufficient returns compared to earning from the rate of interest. After all, the purpose of production for them is not to meet anybody’s physical needs, but simply to accumulate capital. Hence, in a depression, when there is a paucity of demand, they refuse to invest in production, preferring to hang on to their cash. When many owners of capital, each pursuing his individually rational self-interest, do this at the same time, the combined effect is a downward spiral of lower investment, employment and incomes. Of course, as a result, the capitalists too generally experience lower profits. Nevertheless, there is no automatic mechanism in capitalist society that can bring about the rational collective pursuit of self-interest by the capitalists; hence the need for a mechanism which simultaneously stimulates the self-interest of all of them. In these circumstances, it is only a stimulus from outside the system, i.e., through government spending, that can prod the owners of capital as a group to invest. The irony is that capitalists themselves would be beneficiaries of such revival of investment. Demand would rise, and so would their profits. The problem, then, is that, while the various strands of the economy are increasingly intertwined and interdependent, decision-making regarding investment is concentrated in a few hands seeking private profit. Production is social; but ownership of the means of production is private. Keynes’ solution
This would require a mechanism whereby society (or rather, a group of intelligent, disinterested men like Keynes acting on behalf of society) would intervene to stabilise the investment function by stimulating or curbing demand through changes in government spending and interest rates, and preventing the disparities of wealth from getting as large as they were in his day (and ours). To do that it would be necessary to suppress finance, since as long as capitalists can thrive on merely financial activities (what Keynes called ‘rentier’ activities), the incentive to invest in production would be weak. In order to bring about full employment while leaving the means of production in the hands of the capitalists, Keynes wanted the rate of interest to be reduced to the level necessary for full employment. “Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.” Keynes was a very practical person, one who served his government ably in very important positions. He saw the economy in a real-world way and tried to advance his propositions in a manner he felt would be acceptable to the ruling class, and would convince them of their enlightened self-interest. “It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.” (emphasis added) It is intriguing that such a practical man did not see, or did not acknowledge, the obstacles his proposals were up against: that the power of finance is inherent in capitalism, since the aim of production under capitalism is not to produce goods and services for use but to accumulate capital; that the capitalist class would never permit society to socialise investment, since that would automatically raise the question – what need then does society have of the private capitalist, since it can stabilise investment directly?; and that full employment, which Keynes took as the objective of socialising investment, ran counter to a basic requirement of capitalism, the reserve army of labour and the discipline of the sack. Missing from the discussion However, such fundamental questions have been more or less ruled out of public discussion, precisely because of the absence of a socialist system which poses a challenge to the capitalist system. (There are, no doubt, some regimes which in recent years have made pro-people changes in the sphere of distribution of the social product without socialising the ownership of the means of production; however, we have yet to see how far they can go in the former without taking up the latter, and how the owners of capital, locally and worldwide, will deal with this challenge over the medium term.) And further: the absence of socialism’s practical challenge also means that the Keynesian school, too, does not get the hearing it did between the 1930s and the 1970s. That is why, despite failing in every respect, even as a tool to prevent crashes like that of 2008, let alone a tool for creating a decent society, the first school continues to hold sway. The real need for austerity In the developed countries, the question of socially necessary austerity has global implications: the scale and pattern of consumption there, which has been shaped by the requirements of capitalists’ profits, is wreaking havoc at the planetary level itself. (Such patterns are visible in India, too, but only at the level of the elite; India as a whole, for all its rapid growth, is still a small player in the game of planetary destruction.) To prevent this, or even to mitigate this, it would be necessary to actually reduce total consumption, and socially determine what is produced, apart from changing the distribution of it among different classes. However, in the existing social relations, this cannot but depress the economy further. Only a society which ensures full employment, and in which production is determined by social need, and not by private profit, can bring about such a reduction of consumption without a massive increase in suffering. |
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