A Picture of Finance Capital, Or the Income Pyramid under Capitalism

Deepankar Basu, Sanhati

The ideology of neoliberalism: trickle down theory of growth and distribution. The reality a tad different: the gushing up of income and wealth. But, in a manner of speaking, we always knew that this is what neoliberalism was all about; we knew, in other words, that the neoliberal turn of the late 1970s was meant to facilitate the flow of income, wealth and power up the societal pyramid, that it was meant to restore the economic and political clout that “finance capital” had lost during the post World War II period. We knew that it was meant to efficiently pump the economic surplus out of the working people and channel it up the income ladder to the top fraction of the capitalist class. That neoliberalism performed this role even more effectively than expected by its hardest-core champions emerges clearly from recent studies of income and wealth trends of the past few decades.


Noted Marxist economists Gerard Dumenil and Dominique Levy have studied the changing patterns of income and wealth under neoliberalism in great detail . [1] Drawing on the extensive research on income and wealth inequality around the world by Emmanuel Saez [2] and Thomas Piketty [3], Dumenil and Levy clearly show: (a) that the neoliberal regime was preceded by falling income shares of the top income groups in the US for an extended period of time, (b) that the so-called neoliberal turn has clearly reversed the trend towards progressive redistribution of income of the post-War years, (c) that the income shares of the top income groups have climbed back up to pre-War levels, and even surpassed them, and (d) that ownership of the productive resources of society remains as skewed as before making claims of the development of middle-class capitalism in the U.S. totally baseless.

Below, we reproduce some of the striking trends that Dumenil and Levy’s presented in their article in the New Left Review (Volume 30, November-December, 2004) and also extend the analysis to the year 2007 (by using an extended data set that Saez and Piketty has made publicly available). [4] The picture that emerges from such an analysis clearly show that the trends identified by Dumenil and Levy (2004) have continued operating unhindered right until the end of 2007, i.e., right till the onset of the Great Contraction of 2008. Did the current crisis have anything to do with this worsening distribution of income in society? Will the Great Contraction turn into the Great Depression of the 21st century? Will the current crisis unleash progressive social forces that will reverse the horrific neoliberal income trends? Will the working class regain its social and political strength? These are important and interesting questions, but I do not wish to address them in this article.

Let us instead study the evolution of income distribution in some detail. Chart 1 presents data relating to the shares of total income going to various “top” income earning groups in the U.S. for the period 1917-2007. Even a cursory glance reveals the most striking feature shared by all the graphs, their U-like shapes. The U-shape implies the following: the share of total income garnered by the “top” group was historically high in the 1930s (the pinnacle of the original liberal era of capitalism); the share steadily declined after the second World War, through the “Golden Age of Capitalism” (because of the struggle of the working class); the trend reversed course around the late 1970s (with the onset of the neoliberal counter-revolution), and steadily gained lost ground in the next three decades. This general feature is true of all the graphs and is the remarkable feature about income distribution that emerges from all serious studies.

The first graph on the left-top of Chart 1 displays the share of income going to the top 10 per cent of income earners in the U.S. Towards the end of the 1920s, the share of the top 10 percent had nudged 50 per cent (from below); it recovered that level by 2006. The top 10 per cent of the population takes half of all the income created during any year; isn’t that remarkable? Well, that is (neo) liberal capitalism.

The second graph of Chart 1, the one on the right-top, displays the share of income going to the group of income earners running from the top 5 to the top 1 per cent of the population. Much like the top 10 percent, their income fell through the Golden Age and then started the ascent in the neoliberal era, without as yet reaching the historically high levels in the late 1920s.



The third graph at the bottom-left of Chart 1 displays the share of income going to the top 1 percent of the U.S. population. Quite astonishingly, they get more than a fifth of all the income generated in society now: just a nice throwback to the glorious late-1920s, they would point out. Thus, in 1928, the top 1 per cent of the income earners in the U.S. got about 24 per cent of the total income; in 2006, the top 1 per cent of the population was once again receiving about the same share: 24 per cent of the total income generated in the economy.

What about the scenario at the very top, the top of the top so to say? The fourth graph in Chart 1, the one at the bottom-right, provides some clues. As can be seen, the share of income garnered by the top 0.01 per cent of the income earners was about 5 per cent of the total income during the 1920s; that figure had already been reached by the end of the 1990s. The dip in the share at the end of the 2000 is a reflection of the bursting of the dot-com bubble and the ensuing short recession in the early parts of 2001. They got their act together pretty quickly, and the share of total income going to this group rapidly climbed up in the “boom” of the 2000s, surpassing the figure for the heyday of liberal capitalism. In 1928, the top 0.01 per cent of the income earners in the U.S. garnered about 5 per cent of the total income; by 2006 their share of total income was back at that level: 6.04 per cent. Neoliberalism triumphs liberalism!

What do we take away from these striking graphs? I would suggest the following three. First, we can safely make the claim that income and wealth are awfully concentrated in capitalism; a capitalism that caters to the middle class is a myth. To understand the import of this simple proposition recall that the mainstream media never tires of portraying the U.S. economy as a haven for the middle class, where anyone, even Joe the Plumber, can easily climb up the economic ladder with grit, determination and hard work; or, so the story goes. Aggregate trends in the distribution of income over the last three decades that have been presented in Chart 1 clearly makes nonsense of this oft-repeated fairy tale.

Second, the concentration of wealth and income under capitalism is nothing new; it is rather the normal state of affairs in capitalism, as the data for the last 90 years show. When one takes a long and historical view, the so-called Golden Age of capitalism, based on the compromise between capital and labour, and buttressed by re-distributive policies of a welfare state, seems to be the exception rather than the rule. The workings of welfare state capitalism quickly led to the creation of a situation, endogenous it must be remembered, that militated against the core principles and institutional features of welfare state capitalism.

And third, that the concentration of income, wealth and power keeps increasing as we move up the income pyramid, so that the buck really stops at the top. What about the very top of the top of the top? Well, let us see.


Tucked away in an obscure corner of the business section of the New York Times on February 18, 2010 is a small article with some very striking facts relating to the important issues of income, class and power in the U.S. that we have been discussing. [5] The article discusses interesting facts relating to income and taxation of the top 400 income earning families in the U.S., the families sitting on the very top of the income and wealth pyramid in the U.S. Data about the earnings of the top 400 families, based on tax return information, was first made public by the Clinton Administration. Much along expected lines, the Bush Administration cut off access to this report, the so-called “top 400 report”; the Obama Administration has again made it public. [6]

Writing on Tax.com, a Web site run by Tax Analysts, David Cay Johnston provides a wealth of information about the top 400 families that might be worth looking at carefully; the NY Times report drew on Johnston’s article, and we will also use data that he has made available on-line along with his article. [7]

Here are some facts to get started with. Average annual income of the top 400 income-earning families was $131.1 million in 2001; it had more than doubled within the next 6 years, reaching $345 million in 2007. That was a whopping 17.5 per cent annual compound rate of growth over that 6 year period. In 2007, the total income of the top 400 families was $138 billion, rising from $105.3 billion a year ago. Adjusted for inflation, the top 400 families witnessed a 27 per cent increase in their income between 2006 and 2007; the bottom 90 per cent of U.S. families saw their income rise by a mere 3 per cent during the same period. If we go back a little further we see the divergence taking shape more clearly. Between 1992 and 2007, the real income of the bottom 90 per cent of the U.S. families increased by 13 per cent; during the same period, the real incomes of the top 400 increased by 399 per cent.

To put these numbers into some perspective, let us compare the incomes of the top 400 U.S. families with some figures for the whole U.S. economy. Median real income, i.e., income adjusted for inflation, for U.S. families in 2007 was $52,163. According to the U.S. Census Bureau, 37.3 million persons were below the poverty line in 2007 (i.e., about 12.7 per cent of the population was deemed “poor”), where the poverty line was defined (in 2008) as follows: it was $22,025 for a family of four; for a family of three, it was $17,163; for a family of two, $14,051; and for unrelated individuals, $10,991. While the incomes of the top 400 families increased to astronomical amounts, there were 45.7 million people without health insurance coverage in the U.S. in 2007. [8]

To make the comparison a little more systematic and to get an idea of the true nature of the income generation process under neoliberalism, we have summarized some data in Chart 2. [9] The graph on the top-left in Chart 2 plots the inflation adjusted average income of the top 400 U.S. income-earning families from 1992 to 2007. Average real income increased from $71.6 million in 1992 to $356.7 million in 2007, a 399 per cent increase over the 15 year period, which translates into a real income increase of $285.2 million.

The graph on the top-right of Chart 2 plots the ratio of the average income of the top 400 families and the average income of the bottom 90 percent of U.S. families (arranged in terms of household income). In 1992, the ratio was 2419; in 2007, it had become 10634. Think about these numbers again. In 1992, the average income of the top 400 U.S. families was 2419 times the average income of the bottom 90 per cent; in the next 15 years, that ratio had seen a more than 4 fold increase. That is neoliberalism in a nutshell.

The next graph, the one on the bottom-left of Chart 2 plots the share of total income (what the IRS calls the adjusted gross income) that went to the top 400 families. In 1992, the figure was 0.52 per cent; by 2007, it had increased to 1.59 per cent. Now think about that again. During the period under consideration, the U.S. economy had about 105 million households; thus in 2007, the top 400 out of these 105 million households were getting 1.59 dollars for every 100 dollars generated in the economy. (If you divide 400 by 105 million, you get a 0.0000038!)

The last graph, the one on the bottom-right of Chart 2, shows the policy response of the U.S. governments to this rising inequality. What should the state do when faced with this enormous concentration of wealth at the very top of the income pyramid? Why, aid that process. Effective tax rates for the top 400 families saw a remarkable secular decline over this 15 year period, starting at 26 per cent in 1992 and falling to about 17 per cent by 2007. So, as the incomes started flowing up, tax rates started going down. Result: disposable real income, i.e., after-tax real income, of the top 400 U.S. families shot through the roof.




How did this huge income inequality get built up? The simple answer: neoliberal counter-revolution. The whole institutional set-up and policy framework that characterized the so-called Golden Age of capitalism was the result of the class struggle of labour against capital; the power of the working class had managed to institute policies that resulted in the re-distribution of income away from capital and towards labour. The neoliberal counter-revolution reversed this historical trend and got the re-distribution to start working the other way round: move income away from labour and towards property owners and the top wage-earners (managers, technocrats, CEOs, etc.). Probably nothing demonstrates this better than the evolution of wage income, i.e., the income of the working people in the U.S. over the last few decades. Let us take a look.

Chart 3 presents some relevant data on wage income. The first graph in Chart 3, the top-left graph, plots the time series of the average annual real wage in the US economy for the period 1970 to 2005. Average annual real wage is computed from the National Income and Product Account data as the ratio of total wages and salaries and the number of full-time employees; to take account of inflation over the years, the wage has been expressed in 2006 prices. [12] The average annual wage, as shown in the graph, increased from about $38,000 (2006 $) to $47,670 (2006 $). So, did workers really increase their average incomes during the last three decades? The answer is no.

The picture presented in the graph is misleading. The average annual wage in the graph has been computed by including the wages and salaries not only of production workers but also of supervisory workers and managers and CEOs. The “wages and salaries” that accrue to the latter category of “workers” cannot be considered wages in the strict sense of the word; this income comes out of the economic surplus created by production workers. Thus, from a societal viewpoint, income of managers, bureaucrats, CEOs and other such employees are a deduction out of the the total social surplus. Hence, to get a better and more accurate picture of the evolution of what would normally be called wage income, we need to look at the wages of production workers. [13]

The second graph in Chart 3, the top-right graph, plots the time series of weekly real wages of production and non-supervisory workers in the nonfarm business sector of the US economy for the period 1964 to 2009. This data – relating to the production workers in mining, logging and manufacturing, construction workers in construction and non-supervisory workers in the service sector – is taken from the website of the U.S. Bureau of Labour Statistics and is expressed in 1982 prices to remove the effect of price increases (i.e., has been deflated by the consumer price index for all urban consumers with a base year of 1982). Here, we see a remarkable trend, a trend that really explains the secret of neoliberalism: real weekly wages of production and non-supervisory workers fell between 1964 and 2009. True, there was a slight recovery starting from the mid-1990s, but that has not managed to take the real wage back to the level of 1964, let alone the higher level of the early 1970s. Real weekly wages in 1964 was about $314 (1982 $); in 2009, it was about $287 (1982 $). Moreover it is clear that the recovery that had started in the mid-1990s will be pretty difficult to sustain in the midst of the deepest recession since the Great Depression.

Thus, the upward movement of average annual real wages that is depicted in the first graph of Chart 3 is really driven by increases of the “wages and salaries” of non-production and supervisory “workers”, the fraction of the working or middle class that derives its income as a deduction from the surplus value generated by production workers. This would imply a growing inequality even among the ranks of the wage earners.

And that is precisely what is depicted in the third and fourth graph in Chart 3, the bottom-left and bottom-right graphs. Let us look at them one at a time. The bottom-left graph plots the ratio of two quantities: (a) the average annual real pay of the top 100 CEOs in the Forbes survey of the top 800 CEOs (in terms of pay), and (b) the average annual real wage in the U.S. economy (the data that has been plotted in the top-left graph in Chart 3). [14] In 1970, the ratio was about 39; in 2005, it was about 768, coming by way of 1043 in 1999. Thus, in 1970, the average income of the top 100 CEOs was only about 39 times the average annual wage in the economy; in 1999, the average annual income of the top 100 CEOs had become 1043 times the average annual wage in the economy!

The bottom-right graph plots the average real pay of the rank 10 CEO (in 2006$), i.e., the pay of the 10th CEO from the top when all CEOs are ranked according to their incomes. The real pay of the rank 10 CEO in 1970 was about $1.87 million (2006$); in 2005, the corresponding figure was $73.24 million (2006$), having climbed down from an astronomical $109 million (2006$) in 1999. That is more than a 50 fold increase in 19 years!



Thus, neoliberalism not only increased the share of property income (in aggregate national income) but also increased the share of income that accrues to the hangers-on of capitalism, the managers, the supervisors, the technocrats, the bureaucrats, in short the class of people who oversee and facilitate the extraction of surplus value from the working class, and contribute to the reproduction of capitalist relations of production.

How did this impact on the working class and the macro economy? Since real wages were stagnant or even falling, the working class that had become used to increasing consumption levels over previous decades had to be fed with an ever exploding mountain of debt. First the dot-com bubble and then the housing bubble partly facilitated this process. The growing debt kept consumption levels of the working class growing even, but only at the cost of increasing the financial fragility of the macro economy. When the housing bubble burst towards the end of 2006, that started off the financial crisis.

(I would like to thank Debarshi Das, Panayiotis T. Manolakos and Sirisha Naidu for very helpful comments on an earlier draft of the article. The usual disclaimers apply.)


[1] http://www.jourdan.ens.fr/levy/dle2004t.pdf

[2] http://elsa.berkeley.edu/~saez/

[3] http://jourdan.ens.fr/piketty/indexeng.php

[4] The data is available on the website of Emmanuel Saez: http://elsa.berkeley.edu/~saez/

[5] http://www.nytimes.com/2010/02/18/business/economy/18irs.html?ref=business

[6] http://tax.com/taxcom/features.nsf/Articles/0DEC0EAA7E4D7A2B852576CD00714692?OpenDocument

[7] http://tax.com/taxcom/features.nsf/Articles/0DEC0EAA7E4D7A2B852576CD00714692?OpenDocument

[8] http://www.census.gov/Press-Release/www/releases/archives/income_wealth/014227.html

[9] Data used to construct the graphs in Chart 2 comes from David Cay Johnston’s summary of IRS Statistics of Income data and is available on-line at: http://tax.com/taxcom/features.nsf/Articles/0DEC0EAA7E4D7A2B852576CD00714692?OpenDocument

[10] http://www.dollarsandsense.org/archives/2009/0509keeler.html

[11] Dumenil, G. and D. Levy. 2004. Capital Resurgent: Roots of the Neoliberal Revolution. Harvard University Press.

[12] This data is from Saez and Piketty.

[13] Production workers, as we have used the term here, is related to though not strictly equivalent to what is referred to as “productive workers” in Marxian political economy

[14] Average annual wages are in 2006$ and average CEO pay is in 2006$; hence, the exact ratios might a little off the mark though the trend will certainly be fairly accurate.

Kobad Ghandy on “Sugar’s Bitter Policies”


The following article on the present rise in prices of sugar has been written by Kobad Ghandy, the CPI (Maoist) leader now lodged in Ward No. 8 of Tihar Jail No. 3. Though suffering from prostrate cancer and incarcerated in prison he retains an alert mind as is reflected in the following article sent specially for publication in this journal (Mainstream).

At Rs 50 per kg sugar prices have never been so high. With sugar prices soaring, prices of all sugar linked products—sweets, mithais, tea etc.—have also sky-rocketed. Not only will festivals for most become a drab affair, children’s wailing for the little sweet or toffee will get louder. At the rate at which sugar prices have been rising it will be out of reach of many a poor and middle-class life.

One would have thought, given the free-market mantra of the rulers, that high sugar prices would at least convert into higher prices for the producers—the fifty million sugarcane farmers. But that was not to be; the so-called free market functions only to benefit big business, traders and politicians. In this case both the producers and consumers are being crushed by the cane and sugar pricing policies of the government dictated by the millers and international sugar cartels.

It is indeed a policy that has resulted in windfall profits for a few at the cost of millions of farmers and crores of consumers. And the solution being suggested—huge duty free imports—will help no one except the importers, the foreign traders and the bureaucrats/politicians who will get their commissions on each order. The entire people of our country are made to suffer so that a few may make fortunes. This is indeed tragic.

And while the entire people suffer the politics of sugar is diverting the entire issue with the Central and UP governments throwing the blame on each other.

Farmers being Crushed

In October last year the Ministry of Consumer Affairs (Food and Public Distribution) changed the pricing regime for sugarcane and introduced a Fair and Remunerative Price (FRP) mechanism, replacing the Statutory Minimum Price (SMP) system that was prevailing till then. Soon after passing the ordinance the Central Government declared an FRP to the millers to purchase sugarcane at Rs 130 per quintal, when, according to the NAFA (National Alliance of Farmers’ Association), the input cost of one quintal of sugarcane is roughly Rs 233.5 per quintal. This FRP therefore amounts to a massive loss to the farmer.

Immediately after the announcement, farmers (from UP) took to the streets stopping rail and road traffic. They marched to Parliament. They seized trains that sought to bring imported raw sugar and prevented them from reaching the mills. Some took the extreme step of self-immolation. Others burnt their crop. With the rabi season approaching many resorted to distress sales, selling their crop to local gur manufacturers at Rs 155 per quintal. Under pressure from the farmers the UP Government banned the import of raw sugar.

According to the new order, the FRP shall be fixed by the Central Government from time to time. It also specified that any other authority fixing a price for the crop above the FRP would have to bear the difference. (The latter point was retracted after the farmers’ march to Parliament.) The practice so far was for States such as UP, Tamil Nadu, Punjab and Haryana to declare the State Advised Price (SAP) that mills are required to pay farmers. This was usually higher than the SMP which was announced by the Central Government on the basis of the cost of cultivation estimated by the Commission for Agricultural Costs and Prices (CACP).

As it is, for a number of years, sugarcane growers have been squeezed by the low prices paid by the millers and the spiralling input costs. This has led even to many suicides of sugarcane farmers who had at one time earned a good amount for the crop. In fact in the four years from 2004-05 to 2008-09 the SMP for sugarcane barely rose from Rs 79 per quintal to Rs 81 per quintal while input costs increased phenomenally. In addition, the millers cheat the farmers in varied ways—weighing, recovery rate etc. So it is not surprising that sugar production dropped drastically from 27.8 million tonnes in 2007-08 to 16 million tonnes last year. In the coming year production is not likely to be more than 15 million tonnes.

The government did not create a buffer stock in 2006-07 and 2007-08 when production was at its peak. In 2006 when international prices were high (Rs 20,680 per tonne) and local prices were low (Rs 13,000 per tonne) the government banned exports. At that time due to large stocks and ban of exports the millers harassed the farmers paying them late. In 2007-08 when international prices crashed to Rs 13,000 per tonne the government exported 68 lakh tonnes of sugar even though sugar production was dropping. Later when there was shortage the government imported sugar at Rs 10-35 per kg.

It is these shortsighted policies of the government which have played havoc with the lives of the sugarcane farmers. In its report for 2008-09 the CACP warned the government that unless it raised the SMP for sugarcane the net area under the crop would continue to fall. But the government could not be bothered. They expect the millers will import raw sugar and continue to make money. The area under sugarcane cultivation dropped from 4.38 million hectares last year to 4.21 million hectares—that is, a drop of about 1.5 lakh hectares in just one year. Farmers are shifting away from sugarcane cultivation.

Consumers Robbed

Sugar prices have tripled in the last one year from Rs 17 per kg a year back to Rs 50 today. In just the last four months it has risen by over 40 per cent from Rs 32 per kg. Notwithstanding the claims of the Agriculture Minister, sugar prices are unlikely to drop. When production is estimated at a mere 15 million tonnes and consumption at 23 million tonnes without a single kg of buffer stock (compared to 10 MT at the beginning of last year), the price will be determined by the cost of imports. Given the shortfall, a minimum of eight million tonnes will have to be imported.

The raw sugar import cost to the miller will not be less than Rs 38 per kg. With such high costs, what the consumer has to pay is not likely to be below Rs 50 per kg. And with India entering the international market with huge purchases, the international prices are only likely to go up—expected to be up to Rs 70 per kg.

The question that arises is that when the millers are paying Rs 13 per kg to the farmer (FRP rate with recovery at 10 per cent) why should sugar be so expensive? Even if we calculate that for every kg of sugar produced the transportation and processing charges come to Rs 5, the cost of production would be a maximum of Rs 18 per kg. If we add another one-third as profit the selling price comes to Rs 24. Then if we count the wholesaler’s/ retailer’s profit sugar should not cross a maximum figure of Rs 30 per kg. Then why Rs 50? Even if they give the sugarcane grower the rate that is remunerative—say, Rs 23 per kg or Rs 230 per quintal for sugarcane—the maximum price to the consumer will come to Rs 40 per kg. This would be still less than the cost of imported sugar or raw sugar.

So there is no reason for sugar prices to sky-rocket as millers continue to pay a price lower than the remunerative price. Though this may vary from State to State the plight of the farmer in the two main sugarcane growing States—UP and Maharashtra—is pathetic. In Maharashtra, sugar mills are cooperatives dominated and controlled by powerful politicians like Sharad Pawar. In Maharashtra, every farmer is tied to a particular cooperative mill and is not free to sell it to any other. So they are at the mercy of the cooperative bosses who keep the prices of sugarcane low. In UP many mills are owned by big business houses like Birla, Bajaj etc.

Depending on imports is no solution to the sugar problem—whether shortage or high prices. The only solution must be to promote sugarcane production by investing in agriculture and subsidising the farmer. In this way not only would the farmer and rural economy flourish, the consumer too would get sugar at a reliable price.

Need for a Pro-active Agrarian Policy

With nine lakh tonnes of imported sugar stuck at the ports since the last month due to the UP Government’s ban on processing it, the Centre has been blaming the Mayawati Government for the high sugar prices. The Mayawati Government, on the other hand, instead of announcing a high SAP, has clamped cases on the millers under the Essential Commodities Act in order to share the booty made by them. The plight of the millions of sugarcane farmers and crores of consumers is not on the mind either of the Congress or the BSP. They are interested in only extracting their share of the windfall profits being made by the millers, cooperatives, big traders and hoarders.

The only policy that would benefit both the producer and consumer is for the government to invest heavily in agriculture and subsidise sugarcane production. Sugarcane production requires large quantities of water, so irrigation projects should be its first focus. Unfortunately the government has systematically been cutting investment in agriculture. Rural development expenditure of the government averaged 14.5 per cent of the GDP in the 1985-90 period. This dropped to eight per cent in the early 1990s and since 1998 it has dropped even further to a mere 5.6 per cent of the GDP. In real terms, there has been a reduction of about Rs 30,000 crores annually in development expenditures on average in the first five years of this century compared to the pre-reform period.

When investment in agriculture should be increasing as it is there that the bulk of our population live, the above figures indicate a massive reduction with disastrous consequences. Rather than become dependent on imports and thereby compromise the food security of the country, the government needs to invest heavily in agriculture (with focus on irrigation) to boost the production of sugarcane and other crops.

To solve the sugar/sugarcane problem the government needs to increase investment in irrigation, subsidise input cost (fertiliser, pesticide, electricity) and ensure a remunerative price is paid to the farmer. To maintain consumer prices it should put a halt on the profiteering, hoarding and illegal methods of the millers and subsidise sugar particularly for the poor. If the government can announce a massive bail-out to the three-to-four oil companies and Air India, why does it shy away from bailing-out 50 million farmers and a few crore masses? The amounts being suggested to the three-to-four oil companies and Air India run up to Rs 20,000 crores, a lesser amount would be needed for the millions of sugarcane farmers.

‘The Four Rs’ of global capitalism

Michael A. Lebowitz, Links: International Journal of Socialist Renewal

February 19, 2010 — Correo del Orinoco — In Venezuela, people know what the 3Rs stand for: revise, rectify and re-impulse. Like Karl Marx, who stressed that the revolution advances by criticising itself, President Hugo Chavez has argued that it is necessary to recognise errors and to go beyond them in order to advance.

But who knows what the four Rs of global capitalism are? At the recent meeting in Davos, Switzerland, of the wheelers and dealers of global capitalism, the conference theme was “Rethink, Redesign, Rebuild — Improve the State of the World”. But what did they do? Although we don’t know what happened in their dinner meetings (which, as Adam Smith wisely observed, inevitably end up in a conspiracy against the public), there doesn’t appear to be much sign that they improved the state of the world. Of course, there was never a question that these corporate giants and their faithful servants would rethink the logic of capital — a logic of exploitation, expansion of capital, unending generation of needs and consumerism, and the destruction of what Marx called the original sources of wealth, human beings and nature. How could they? But did they redesign and rebuild in order to improve the state of the world for capital?

Not noticeably. However, that doesn’t mean they have not already been advancing on their real 3Rs. To improve the state of world capitalism, Reverse has become a major theme — especially in the western hemisphere. Given the growing rejection of neoliberalism and global capitalism that has been occurring in Latin America, given the inroads that have been made by a new conception of national sovereignty, international solidarity and socialism for the 21st century, capital sees the need to reverse those advances. Honduras, the Colombian military bases, subversion in Paraguay, Ecuador, Bolivia and Venezuela — all this is capital’s effort to improve the state of its world.

Of course, as we know, global capitalism has had its problems lately — the economic crisis, which is the result of a long process of overaccumulation. And so, it is indeed engaged in a process of redesigning or, rather, Restructuring. It is important to recognise that a crisis in capitalism is not the same as a crisis of capitalism. For a crisis in capitalism to become a crisis of capitalism, you need actors who are prepared to put an end to capitalism. There is, though, no sign of that in the immediate future. And so, like before, capital will proceed to restructure itself. After the depression of the 1930s, capital restructured itself internationally through the Bretton Woods agreements that created the International Monetary Fund and the World Bank. We can already see a similar attempt underway with the shift from the G7 to the G20 — in other words, the incorporation of new emerging capitalist powers such as the BRICs (Brazil, Russia, India and China). And, international capital clearly hopes that through this process of restructuring in which it brings the new important capitalist actors to the head table for international discussions, it will be able to resume its process of growth in accordance with the logic of capital. Reverse, Restructure and Resume — these are the 3Rs that global capitalism wants.

However, there is a fourth R of global capitalism. The very solution to the crisis that capital introduces — that restructuring which brings the emerging capitalist countries to the central committee — implies the right of the latter to be full members, i.e., to achieve levels of consumption and economic development equal to the present levels of the North. Yet we know that the world’s resources and the Earth itself cannot possibly sustain this. And in this situation of true scarcity, how can capitalism solve this?

Capitalism, after all, is a system in which all capitals are trying to expand as much as possible. However, it is not a system in which all its members march in unison; and, as Lenin explained in relationship to World War I, the combination of uneven rates of development and scarcity is a major source of conflict among capitalist countries. In this situation, the new emerging powers want the fourth R– Redivision. Redivision of resources, redivision of industrialisation, redivision of the right to emit carbon — the struggle is on. It is a struggle over access by capital to scarce resources, energy, water and food.

Clearly, in this world of immense inequality, exclusion and starvation, redivision is necessary if we are ever to realise the ideal embodied in the Bolivarian Constitution of Venezuela of the importance of ensuring the overall human development of all people. We want a world, a socialist world, in which (as Marx and Engels stressed) “the free development of each is the condition for the free development of all”. But, capitalist redivision is a process of struggle over the right to exploit. It is a struggle not only among capitals but also against the exploited and excluded of the world.

Who would doubt that this struggle will become more intense as the logic of unremitting capitalist expansion comes up against the reality of natural limits? The slogan writers for Davos were right. We do need to “Rethink, Redesign, Rebuild — Improve the State of the World”. And, we need to redivide, too — to create a world without capitalism. As Fidel Castro and Hugo Chavez continue to remind us, humanity is faced with a critical choice — socialism or barbarism?

[This article first appeared in the February 19, 2010, issue of Correo del Orinoco, the new weekly English-language newspaper published in Venezuela.]

Proletariat, a dangerous idea: Class struggle in Journalism

Pratyush Chandra

Last week, India’s “wall street journal”, Mint, brought out an interesting editorial entitled, Proletariat, a misleading idea (posted on December 29). In the editorial of a business newspaper meant for stockmarketeers and businessmen, what else do you expect on a conceptual matter? First it will trivialise the concept, mostly because of the authors’ ignorance, but sometimes for conscious propaganda too.

In the editorial a historical snapshot of the usage of the term, “proletariat”, is presented – underdog (during the industrial revolution), obsolete (due to Western welfarism), buried (after the cold war), renewal (during the recent “upswing in industrial unrest”). Ultimately, the argument is simple that the workers’ problems must not be posed as matters of class struggle (“conflict between managements and labour”), rather they should be left entirely to free market “competition between firms” with full freedom to hire and fire, which will eventually resolve everything. And also don’t talk about “rights” because they politicise the workplace, obstructing a free competition between firms. Don’t talk of unionisation – let the bosses continue to scramble freely for golden pie in market growth, and you wait open mouthed for flying crumbs to fall. That’s the message.

This message is understandable, but I was still surprised why such an urgency to call “proletariat, a misleading idea” – does it really need an editorial to be devoted upon? Casually, I continued browsing Mint‘s website for other pieces on labour matters, and I found out the reason. There was an elaborate report on the labour unrest in the auto industry which was posted the previous day (December 28): The rise of the new proletariat“. It provides a decent backgrounder (decent in comparison to other news reports on labour issues) on the recent industrial unrest in India. In fact, Maitreyee Handique’s (the reporter) has been sensitively presenting the labour side of industrial relations in India. She quotes a Trade Union leader in this particular report:

“Today, my boys are educated. They know how to use computers. They are not going to (sit by) and watch exploitation”.

So these “boys” constitute the “new proletariat”!


So what’s different about this wave of trade union activity? Timing. It comes as the world is emerging from a financial crisis that marks an inflection point in its industrial development. As the world’s fastest-growing economy after China—and one that sailed through the economic crisis relatively unscathed—India is poised to become one of the powerhouses that pulls everybody else out of the trough.

Take India’s automobile sector—it’s helping to define the future of the global car industry by churning out the low-priced models that are propelling growth as markets elsewhere lose steam. It’s also one of the key fronts on which workers are fighting companies, which explains why the stakes are so high.

And more,

In other nations, such as Malaysia, contract workers are actually paid more because they don’t have job security, said C.S. Venkataratnam, director at the International Management Institute in New Delhi.
“Here (in India), the typical argument is that workers are not qualified,” he said. “In India, we do not pay premium, but discounted wages, for quality.”

Workers say lopsided numbers at many companies – a small regular workforce dwarfed by a larger group of contract hires that’s being constantly retrenched and replenished – render it impossible to register demands and make management responsive.

However, the reporter is determined not to take sides and end the report with an employer’s view:

Kapur said the trouble at the factory was “politically motivated by outside influences”, without elaborating. He accused the unions of trying to create an atmosphere in which industry wouldn’t be able to survive, saying that this had already happened in the two states where the communists are holding power.

“Kolkata and Kerala don’t have industries, and now it’s starting in Gurgaon,” Kapur said.

Despite this balancing between the perspectives of labour and capital in the report, it seems the title “The Rise of the New Proletariat” was quite chilling for the business community, and the very next day the editors, who sensed this, felt the need to target the very two issues that the above report brought out:

“the disparity in wages between contract and permanent employees and difficulties in forming unions at workplaces.”

And they found India’s new chief economic advisor, Kaushik Basu’s statement authoritative enough to correct the damage done.

Further, Mint in the end had to assure its readers:

“Today, the nature of work in modern economies is very different from what it was in the Victorian age. Many workers in the same firm don’t even work together. The idea of a proletariat rests on shared experiences at a workplace. That is a fiction even in assembly line manufacturing today. A gentle draught of economic reason is enough to evaporate a politically evocative expression.”

It seems that the very Idea of Proletariat is dangerous, it smacks of class struggle, it (mis)leads workers to unrest leaving the capitalists distraught.

Emerging Global Power and Hunger

Deepankar Basu

The Global Hunger Index (GHI), calculated by the International Food Policy Research Institute (IFPRI), ranks countries on a 100-point scale, with zero being the best score having no hunger and 100 being the worst. This index gives an indication of how successful the country has been, relative to others, in dealing with the extremely important problem of hunger of the vast majority of its citizens.

Why use such an index? This is how the IFPRI website explains the rationale for calculating the Global Hunger Index:

Countries can gauge their economic performance by looking at gross domestic product, but to assess their progress on fighting hunger, they must usually consider a multitude of indicators. To provide a simple way of ranking countries and illustrating trends in hunger worldwide, IFPRI developed a Global Hunger Index (GHI). The index captures three dimensions of hunger: insufficient availability of food, shortfalls in the nutritional status of children, and child mortality. Using data from the Food and Agriculture Organization of the United Nations (FAO), the World Health Organization (WHO), and the United Nations Children’s Fund (UNICEF), the index ranks countries on a 100-point scale, with 0 being the best score (no hunger) and 100 being the worst. By highlighting this information, the index is designed to help mobilize political will and promote effective policies for combating hunger.

The recently released figures of the Global Hunger Index for 2009 says that countries that have scored between 20 and 30 points are in an alarming condition. What is India’s score? 23.90!

There is more. India is ranked 65 in a group of 88 countries. Countries like Uganda (which is ranked 38th), Mauritania (with a rank of 40) and Zimbabwe ( which is ranked 58th) and many others have a better record than India on this front. To see what this means let us do some simple comparisons between India and Zimbabwe.

In 2008, India’s GDP was 3.304 trillion $ (PPP); Zimbabwe’s GDP in 2008 was 1.925 billion $ (PPP). Thus, in terms of the total market value of goods and services produced in 2008, India was 1716 times richer than Zimbabwe. Of course India has a much bigger population which needs to be taken account of if the comparison is to be meaningful. So let us look at GDP per person: India, in 2008, had a GDP per capita of 2,900 $ (PPP); Zimbabwe, in 2008, had a GDP per capita of 200 $ (PPP). Thus, Zimbabwe is about 14 times poorer than India in terms of the market value of goods and services it produces annually, even after taking account of population differences, but it has been better able to deal with the problem of hunger! Shouldn’t Indian policy makers be proud of themselves?

Now compare this to a set of figures, from the World Wealth Report, that had been released a few days ago: in 2009, India had 52 billionaires, with the richest, Mukesh Ambani, having a net worth of $ 32 billion. The combined net worth of the richest 100 Indians in 2009 was US$ 276 billion; their Chinese counterparts had a combined net worth of US$ 170 billion. To make the comparison meaningful recall that China’s GDP in 2008 was $ 7.992 trillion (PPP) while India’s GDP in 2008 was only $ 3.304 trillion (PPP): wealth is far more concentrated at the top in India than it is in China (the other emerging super power).

Let me summarize: (1) compared to most other countries in the world, the condition of the poor in India is abysmal; a simple comparison is the rank by the Global Hunger Index (GHI); according to the 2009 GHI, India is far worse than Zimbabwe in terms of hunger; (2) compared to most other countries in the world, the position and weight of the super rich in India has “improved” beyond imagination; this is captured nicely by the fact that wealth is far more concentrated at the top in India than it is in China, the fastest growing country in the world.

Doesn’t this give a good illustration of how India is emerging as a new global power?

“America’s Head Servant?”

An article in the recent issue of New Left Review (Nov-Dec) authored by Hung Ho-Fung demonstrates the fragility of the Chinese rise. The author singles out two major factors that fuelled this rise:

1) Stagnant industrial (especially manufacturing) wages for the last three decades;


2) An urban-biased approach to development leading to a “prolonged ‘limitless’ supply of labour”.

By bankrupting the rural economy, China has pumped up its urban industrial growth, trade surplus and financial capital.


This is how China lured global capital, even from other East Asian economies, which consequently put China at the helm of East Asian capitalism. But the same strategy has made China dependent on the ups and downs of the global (esp., American) economy. Cheap labour and rural bankruptcy, which constitute the basis of Chinese growth, cannot provide a viable domestic demand structure for the growth to sustain during a global recession. Further, the rise of the Coastal bourgeoisie and their cohorts within the Communist Party will not allow demand stimulus which brings about structural changes challenging their political-economic hegemony.

The “capitalist roaders” in China are fully entrenched within the State and Party, so “class struggle within the party” will not be enough, a new full-fledged Chinese Revolution is what is called for.

How can the U.S. Unemployment be solved?

10.2% of Americans are unemployed. Another 5.3% are underemployed. Now President Obama faces criticism that he lost focus on creating and saving jobs.

Courtesy: newsy

US Economy from a Working Class Perspective

Deepankar Basu

Rising continuously for the last 30 months, the official unemployment rate in the US economy crossed over to double-digit territory in October 2009. According to figures released recently by the US Bureau of Labour Statistics, the official unemployment rate in the US was 10.2 percent in October 2009; this is the first time in 26 years that the official unemployment rate has crossed 10 percent in the US. But the official measure is a gross underestimation of the reality of joblessness in the US. A more sensible measure, which takes into account the “discouraged” and part-time workers, stood at 17.5 percent!

The November 6, 2009 Fact Sheet from the Economic Policy Institute, a progressive think tank in the US provides more interesting facts about the US economy, especially relevant for working-class people; below I provide some of the entries from the above fact sheet as a summary of important facts about several neglected dimensions of the US economy:

Historical context
• Current unemployment rate (October 2009): 10.2%
• Current underemployment rate, including people who have been unable to find full-time work and are working either
part time or not at all: 17.5%
• Number of consecutive months of job loss during this recession: 22
• Last time the United States saw 10.2% unemployment: April 1983
• Number of months double-digit unemployment lasted during the 1980s recession: 10
• Peak rate of unemployment during the recession in 2001: 5.5%
• Number of months that passed after the 2001 recession had officially ended before unemployment peaked, at 6.3%: 19

Current recession
• Ratio of job seekers to job openings when the current recession began: 1.7 to 1
• Ratio of job seekers to job openings today: 6.3 to 1
• Total number of jobs lost during the current recession: 8.1 million
• Number of people who have been unemployed for more than six months: 5.6 million
• Jobs needed to return to pre-recession employment levels when population growth is factored in: 10.9 million

Demographic data
• Current unemployment rate for black workers: 15.7%
• Current unemployment rate for Hispanic workers: 13.1%
• Current unemployment rate for white workers: 9.5%
• Current unemployment rate for men: 11.4%
• Current unemployment rate for women: 8.8%
• State with the highest unemployment: Michigan, 15.3%
• State with the lowest unemployment: North Dakota, 4.2%
• State showing the largest portion of job loss during this recession: Arizona, 10%
• Unemployment rate among black workers in Michigan: 23.9%
• Unemployment rate among white workers in Michigan: 13.7%
• Unemployment rate for college-educated workers: 4.7%
• Unemployment rate for workers who did not complete high school: 15.5%

Related economic data
• Number of Americans with no health insurance in 2008: 46.3 million
• Number of Americans projected to have no health insurance by 2010: more than 50 million
• Percent of U.S. population living in poverty in 2008: 13.2%
• Percent of U.S. children living in poverty in 2008: 19%
• Percent of African American children living in poverty in 2008: 34.7%
• Portion of African American children expected to be living in poverty in the coming years, as a result of higher unemployment: more than half

Unemployment as a choice

Deepankar Basu

“So, if you are not employed by the financial industry (94 percent of you are not), don’t worry. The current unemployment rate of 6.1 percent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 percent.”

That was Casey B. Mulligan, Professor of Economics at the University of Chicago, writing in the New York Times on October 09, 2008 about what he then considered to be a robust economy. The official unemployment rate for the economy that Professor Mulligan was writing about, the U.S. economy, steadily climbed since he shared his wisdom with the world; according to the latest figures released by the U.S. Bureau of Labour Statistics, the official unemployment rate stood at 9.8 percent in September 2009. Despite the best wishes of Professor Mulligan and his colleagues at the University of Chicago, the unemployment rate has decided to move in the opposite direction. According to all sensible estimates, it will cross 10 percent by the end of 2009 and stay close to that figure for the next year. Even this high figure for the official unemployment rate does not capture the true degree of labour under-utilization currently afflicting the U.S. economy. A more comprehensive measure of labour under-utilization that takes account of discouraged workers who have dropped out of the labour force and part-time workers who are searching for full-time employment stands at 17 percent!

What is of course interesting is that the school of macroeconomics popularised by Professor Mulligan’s distinguished colleagues at the University of Chicago and elsewhere known as the Real Business Cycle (RBC) view of macroeconomics does not even recognize existence of unemployment. In case you have missed that, let me state it again: for the RBC view of macroeconomics, unemployment, as we understand that term, is a fiction; it does not exist. So, how does this strand of macroeconomics view the fluctuations of employment that goes with the typical business cycle? Here is the story they tell.

Every worker derives “utility” (don’t ask what that means) both from consumption and leisure. Now, to finance consumption expenditures, she must work because that is how she can earn her wage income. By working, of course, the worker gives up precious leisure and so experiences dis-utility (again, don’t ask what that means or how it can be measured). It is, therefore, the balancing of the extra – marginal in the language of economists – utility derived from the next unit of consumption and the dis-utility associated with giving up that last bit of leisure that determines whether the worker wants to work or not and for how many hours a week (say).

But the worker, as every other agent in the RBC models, are endowed with enormous computing powers; they not only look at the present, they also peer into the depths of the infinite future. It is thus that the balancing of marginal utility and dis-utility takes on an inter-temporal dimension. Depending on the changing incentives to work in different time periods, the worker decides how much labour to supply, i.e., how many hours she wishes to work. The level of employment, and by definition unemployment, is therefore, in the RBC view, driven by changes in the incentives to work; employment is a choice that workers make. There is no unemployment, only equilibrium fluctuation of employment chosen by workers inter-temporally balancing the marginal utility of consumption against the dis-utility of work. According to this view, then, unemployment occurs because workers decide not to take up the offers they get, i.e., when unemployment is observed it is because the workers choose to remain unemployed.

There is a hidden assumption here: enough jobs are available to workers, in the first place, to choose from. What if enough jobs are not available? How will workers then choose from jobs that are not even available? Would it then still be possible to claim that fluctuations in unemployment are merely the result of inter-temporal optimization exercises on the part of workers balancing marginal utility of consumption against the dis-utility of work. Evidently not. So, how would we test whether the RBC view of unemployment is borne out by facts? If unemployment is “chosen” by workers, as the RBC view claims, then the number of job seekers and job openings should not deviate too much from each other and certainly not for prolonged periods of time; if, on the other hand, unemployment is forced on workers by the hiring decisions of capitalists, the the ratio of job seekers to job openings should increase secularly during recessions. What does the evidence in this regard show?

The Chart plots, for the U.S. economy, the ratio of (a) number of job seekers, and (b) the number of job openings. In December 2000, the ratio was close to 1; thus, in December 2000, every worker looking for a job had, on average, a job available. In December 2007, when the Great Recession started, the ratio stood at 1.7, i.e., on average, every job opening had 1.7 job seekers. As the recession progresses, the ratio climbed steadily and by August 2009, it stood at 6.3. Hence, in August 2009, every job opening had, on average, about 6.3 job seekers. Thus, the ratio continually increased for 20 months, and will possibly continue to do so for the next few months. What do you say, isn’t that evidence in support of the RBC view?

Failure of Economics to Failure of Capitalism?

By Deepankar Basu, Sanhati.

On a visit to the London School of Economics last year, the Queen of England, expressed surprise at the apparent failure of the economics profession to predict the financial crisis and the Great Recession that came in its wake. “Why did no one see this coming?” asked the Queen to Luis Garicano, a professor of economics at LSE. Garicano’s colleague and economist Tim Besley and eminent historian of government Paul Hennessy stepped up to the task and attempted to answer the Queen in a short letter [PDF] written to her on behalf of the British Academy. In the letter they concluded that “the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.”

Post-Keynesian economist, Thomas Palley, called out the narrow vision of the Besley-Hennesy letter. According to Palley, the cause of the failure cannot be ascribed to the failure of the collective imagination of many bright people, whatever that might mean; instead the failure should be located in the unique “sociology of the economics profession,” which has hounded out most dissenting voices. This failure, moreover, “was a long time in the making and was the product of the profession becoming increasingly arrogant, narrow, and closed minded” and excluding all who did not adhere to the dominant ideological construction of mainstream economics. Interestingly, Palley also points to a host of articles written from a heterodox perspective which spelt out the seriousness of the problems facing the economy as early as 2006; of course, the mainstream media, the US administration and the mainstream economics profession did not heed their advice.

In July 2009, the London-based Economist, the most sophisticated and well-informed voice of capital, ran a series of articles on the problems ailing the discipline of economics. The series took a hard and critical look, always from the perspective of keeping the long-term inst rests of capital protected, at both macroeconomics and financial economics, the two branches of economics at the very center of the current crisis; it all began, one must remember, as a financial crisis – the bursting of the housing bubble, the collapse of investment banks, the falling stock market, the seizing up of the credit markets – and quickly turned into what commentators have started calling the Great Recession.

Nobel Laureate Robert Lucas of the University of Chicago is one of the key architects of recent mainstream macroeconomics, the founder and propagator of the so-called rational expectations “revolution” in economics. In the Chicago vision of the macro economy, all economic actors are super rational. How do they display their rational behaviour? By making decisions on the basis of all currently available and relevant information. In other words, all economic agents are magically endowed with unbelievably large computing capacities whereby they gather all the relevant information, process it at lightning speed and arrive at perfect decisions. In this world there are no manias, no panics, no herd behaviour, no contagion, no asset price bubbles, no crashes; there is only smooth and rational adjustments. If the real world of capitalism does not resemble this, so much the worse for the world! Unfazed, therefore, by the recent economic and financial crisis, Robert Lucas jumped in to defend the recent turn in macroeconomics: even mildly critical pieces in as friendly a journal as the Economist needed to be countered. His contribution, of course, started off a Lucas round table, which, by the way, has some interesting posts (for instance Smither’s post on why the Efficient Markets Hypothesis must be discarded).

University of Chicago economists are notorious for their devotion to the magic of the market. In what even then looked like a wacky position, Casey Mulligan of the University of Chicago, a colleague of Lucas, had argued in early October that the economy was not doing as bad as it looked; the unemployment rate was only about 6 percent and so there was no need either to worry or for the government to work out a fiscal stimulus. Today when the official unemployment rate is nudging double digits and most sensible economists believe that it will remain high for the next year or so, making this the deepest recession since the Great Depression, Mulligan’s position, and the Chicago position in general, seems so horrendously out of touch with reality.

A detour into some details of how the unemployment rate is measured in the US might not be out of place. To start with, one must recall that one of the most serious problems that any capitalist economy, like the US, faces is to provide well-paying stable employment for its working population. The inherent logic of capitalism usually prevents this problem being solved in any satisfactory manner and for long periods of time. Hence, capitalist economies are typically plagued by serious labour underutilization.

There are several ways to measure labour underutilization and the Bureau of Labour Statistics (BLS) in the US currently uses six measures (U-1 through U-6). Data for these measures come from two monthly surveys conducted by the BLS: (1) the Current Population Survey (which is a survey of about 60,000 households); (2) the Current Employment Statistics Survey (which is a survey of about 160,000 business and government agencies). For both surveys, as explained on the BLS website, the data for a given month relate to a particular week or pay period. For the household survey, “the reference week is generally the calendar week that contains the 12th day of the month.” For the establishment survey, on the other hand, “the reference period is the pay period including the 12th, which may or may not correspond directly to the calendar week.”

It has been known for quite some time now that the official unemployment rate (the U-3 measure) provides us with a seriously underestimated measure of labour underutilization. The reason is simple: U-3 does not count those workers who become so discouraged by long spells of unemployment that they stop looking for work altogether, drop out of the labour force and, therefore, not even counted among the unemployed. To deal with this problem, the BLS provides a more comprehensive measure of labour underutilization, U-6, which takes account of part-time workers (who want but cannot find full time jobs) and marginally attached workers (these are the “persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past”). While the official unemployment rate is 9.7 percent (see chart below), the current value of U-6 is a whopping 16.8 percent! And this despite the massive fiscal stimulus of the Obama administration. How about asking an unemployed worker who has not found a job for the last 15 months (say), and has possibly even stopped looking for one due to sheer discouragement, whether her being unemployed is the result of a “rational” decision she has made on the basis of some inter temporal calculations?


At the other end of the mainstream economics profession, liberal economist, Nobel Laureate and New York Times commentator Paul Krugman has written a balanced and even-handed critique of the recent turn in macroeconomics, precisely the turn that Lucas so painstakingly tries to defend. Krugman makes two points: (1) how the orthodox belief in the efficiency of the markets (and especially financial markets) is neither based on facts nor makes for good policy; (2) how and why fiscal policy, long banished from the realms of mainstream macroeconomics, came to the rescue in the Great Recession, i.e., in preventing the Great Recession from turning into the second Great Depression, and why it should become part of the mainstream curriculum again. Krugman ends with a plea to return to the deep wisdom of Keynes, knowing full well that Keynes’ efforts were all directed at reforming capitalism and not replacing it . Even this mild reproach drew fire from Chicago economist, John Cochrane; in his post, Cochrane has, to my mind, not managed to respond to any of the substantive points raised by Krugman. Much along Krugman’s line is also the recent piece by Robert Skidelsky, Keynes’ biographer and the recent interview of macroeconomist Robert Gordon of Northwestern University; in a similar tone, Richard Posner asks whether economists will escape a whipping; no prizes for guessing the answer. For more debates along similar lines see this page on the Financial Times.

As an interesting aside, there was an earlier round of debate between Krugman/De Long and Cochrane. Early in the year, Cochrane had written a piece on why fiscal stimulus will not work. In that article, he had basically repeated some pre-Keynesian fallacies (like the Treasury View that every dollar of debt-financed expenditure by the government necessarily cuts back the same amount of private investment expenditure and hence that fiscal stimulus is ineffective). Brad De Long of UC Berkeley and Paul Krugman took Cochrane to task for repeating these fallacies; here is Delong’s piece (which has a nice example on a credit economy with four agents) and here is Krugman’s. Cochrane makes the simple mistake, as Krugman points out, of assuming that the pool of savings is fixed (i.e., before and after the fiscal stimulus), which leads him to conclude that when the government dips into this pool of savings that must necessarily deprive some private entity of an equal amount of saving (and hence reduce private investment expenditure by that amount). It is amazing how this simple fallacy persists over time, despite repeated attempts by Keynesian economists to point it out over the last 60 years. When the government takes a part of the pool of savings available to society and uses it for making purchases, the multiplier effect of this government expenditure increases the output of the economy (especially so when there is massive unutilized capacity lying around) and, thereby, also the savings out of that output; when the multiplier has run its course, the economy has a larger pool of savings. Therefore, debt-financed government expenditure need not crowd out private investment, other than in the case when the economy is already operating near full-capacity, a far cry from the state of the US economy today.

Limitations of the Debate

While this debate between the “saltwater economists” (liberal wing of the mainstream economics profession in the US, located mostly on the two coasts) and the “freshwater economists” (conservative wing of the economics profession in the US, located mostly in the central part of the country) is a welcome break from the free market fundamentalism of the mainstream press, one should not overlook the limitations of the framework within which the debate is being conducted. Roughly speaking, that framework is marked by its two boundaries, on the left by a version of Keynesianism (that economists like Krugman uphold) and on the right by Chicago-style economics. That is the space that is provided in this debate, and thus it naturally excludes: (a) any discussion of a much broader and richer heterodox tradition in economics (which includes Post-Keynesians, Ricardians, Institutionalists, Marxists, etc.), (b) any discussion of the material basis of the victory of freshwater over freshwater economics, and (c) any discussion of alternatives to capitalism.

It is surprising that Krugman does not even once refer in his piece to the heterodox tradition in economics, especially so because he devotes so much space to a discussion of macroeconomics. Over the last two decades, heterodox macroeconomists in the Marxian and post-Keynesian tradition have developed an impressive body of research, both theoretical and empirical, that speaks to most of the issues that mainstream macroeconomics so cleverly avoids. The Classical-Marxian theory of long run economic growth complemented by the short run theory of economic fluctuations of the post-Keynesian variety offers a real, comprehensive and coherent alternative to the theoretical sterility of mainstream macroeconomics, and it is indeed unfortunate that Krugman does not care to engage with this body of research.

When Krugman portrays the victory of freshwater economics over saltwater economics as a seduction of truth by beauty, he misses one very important aspect of that victory. The victory of conservative economics coincides beautifully with the rise to dominance of finance capital, the fraction of the global ruling class most closely allied with and deriving their incomes from the financial sector. How can one miss the coincidence of the exhaustion of the postwar temporary and partial victory of labour over capital and the rise of monetarism, mark I and then mark II? As economist Gerard Dumenil had pointed out long ago, the fads and fashions in mainstream economics is determined less by the internal logic of the discipline than by changes in the structure and functioning of the world economy and the changing correlation of class forces. This is an aspect that commentators like Krugman totally miss.

Talking of alternatives to capitalism, while it is obvious to many economists and activists that the current crisis is a crisis of capitalism, and that it necessitates the search for alternatives to capitalism by linking up with the long socialist tradition, the current debate does not even entertain discussion of such alternatives. While it is expected that freshwater economists will not tolerate any criticism of capitalism, saltwater economists are no less conscious about respecting the commonly accepted boundaries of the thinkable. For one must not forget that Krugman, like Keynes fifty years ago, is out to reform capitalism and not to replace it. And that is as far left as the framework will allow the debate to veer; even thinking about an alternative to capitalism is taboo within the terms of reference of this debate. Socialism is not even allowed to wander, if only by mistake, into the terms of the discourse.

That is the fundamental limitation of the discipline of mainstream economics: its inability to adopt a historical perspective and see capitalism as merely one way of organizing social production, a mode of production with a definite historical birth and therefore with a future historical transcendence. Mainstream economics, to the extent that it ever reflects on the philosophical foundations and founding assumptions of the discipline, sees the “laws” that it discovers as natural laws, valid for all historical epochs. The obvious corollary is that capitalism is eternal; the way things are organized today is how they have always been and will always be. Of course there will be technological progress and institutional development, but there never was nor will ever be any radical qualitative change in the way social production is organized, in the ownership of property. Much before Fukuyama, mainstream economics had silently accepted the non-existence of history.

This is where the Marxist tradition of political economy is far superior to what Marx called “bourgeois economics”. Grounded in a materialist conception of history, the Marxist tradition analyses the fundamental contradictions of the capitalist system, contradictions which cannot be resolved within the parameters of the capitalist system. These contradictions cannot be dealt with by more or less regulation of the financial or product or labour markets, it cannot be dealt with by fiscal or monetary policy to stabilize business cycle fluctuations, it cannot be dealt with by better regulation of international trade and finance; these contradictions, while changing form according to the changing institutional setting of capitalism, will inevitably and recurrently break out on the surface as long as capitalism survives.

What are these fundamental contradictions of capitalism? The contradiction between social production and private appropriation and control of the product of that production process; the contradiction between use-value and value; the contradiction between the two fundamental social classes, workers and capitalists, of capitalist society. While the first of these is easy to grasp and therefore needs no elaboration, it might be worthwhile spending some time thinking about the other two.

For Marx, capitalism was a type, a sub-class, of commodity producing society and so, to understand the dynamics of capitalism, he started his analysis in Volume I of Capital with commodity production. But what is a commodity? Every society must produce to meet its material needs. Where the products of human labour emerge as the private property of economic agents, and which are then exchanged through a process of bargaining, they are called commodities. Another way to see this is to realize that the products of human labour that emerge in a system of production organized through exchange are precisely what Marx calls commodities.

Come to think of it, there are only two ways that human needs can be satisfied in a commodity producing society, either by consuming one’s own product or by exchanging it for something else that one needs. This simple observation immediately throws up the dual nature of commodities. On the one hand every commodity is a use value because it can satisfy human needs; on the other hand, every commodity can also be exchanged for every other commodity. The aspect of exchangeability of commodities is what Marx terms value. What is the essence of the aspect of exchangeability of commodities? The fact that they are all products of human labour. For Marx, therefore, value is created by labour, properly defined, and is expressed in money (value separated from any particular commodity). What has all this to do with capitalism?

Capitalism is the special class of commodity producing society where labour power (the capacity to perform useful human labour) itself becomes a commodity. While a commodity producing society with owner-producers typically “sell to buy”, the characteristic transaction under capitalism is “buy to sell”. A representative capitalist starts with a sum of money, buys raw materials and labour power with it, brings them together in the production process and then sells the products to end up with a sum of money which is larger than the sum he started out with. If we now recall that money is nothing but the expression of value, we see that the capitalist ends up with more value that he started with, in a word surplus value. Capitalism, therefore, is a system of social production, that is governed by the logic of producing surplus value. The production of use values, things that can actually satisfy human needs, is just incidental; as far as capital is concerned, the aim is to produce surplus value by producing no matter what use values. When those use values cannot satisfy existing needs, new and artificial needs can always be “manufactured” by the capitalist media. Value needs to be embodied in use values and yet it is totally indifferent to the existence of particular use values; this is the sense in which use values and value stand in a contradictory relation under capitalism.

What about the contradiction between the fundamental social classes? Every class divided society rests on the appropriation of unpaid surplus labour by the ruling class (or bloc of classes) from the direct producers. In feudal societies, the ruling class directly appropriates the surplus labour of peasants as “labour services”; similarly, in capitalism, the capitalist class appropriates, but now through the institution of wage-labour, the surplus labour of the workers. The apparent freedom and equality (between the two parties to an exchange) guaranteed to workers through the institution of wage-labour and markets makes the appropriation of surplus labour almost invisible; equality of the relations of exchange make the exploitation of the working class difficult to see. But it exists nonetheless and the tools of Marxian political economy brings it to light.

It is these fundamental contradictions that manifest themselves periodically as crises of the system, the most characteristic feature of which is the simultaneous existence of unfulfilled human needs (unemployment) and unused capacity (idle plant and machinery) to fulfill those needs. Capitalism, as a system, is defined by these contradictions, they are not extrinsic to capitalism; hence, only a positive transcendence of the capitalist system can resolve them. It would have been useful if the current crisis of economics was utilized to focus our attention on the crisis of capitalism, but the way the terrain of debate has been circumscribed by agreed upon assumptions, this seems rather unlikely.

(I would like to thank Amit Basole and Debarshi Das for helpful comments on an earlier version.)