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Posted by Deepankar Basu December 28, 2011 at 10:31 pm in Economic Notes, Economy, Finance, USA, Working Class
Deepankar Basu
The global financial crisis that started with the bursting of the housing bubble in the U.S. in 2007 imposed both direct and indirect costs on the working and middle class populations. The direct costs are those associated with the bail-out of financial institutions, which will ultimately be borne by the taxpayers; the indirect costs are those associated with the ensuing economic crisis and the deep and prolonged recession that came in its wake, which, again, will be mostly borne by the working class population. While both costs lead to increasing deficits, and over time accumulating debt, of the federal government, they are of vastly unequal magnitudes. The direct cost (i.e., the costs associated with bailing out the financial institutions immediately after the crisis) is much smaller than the indirect cost (i.e., the cost, in terms of rising unemployment and government deficit if one considers the latter a cost, arising due to the recession); the contribution of the bail-out funds to the build-up of sovereign debt, in the US (and Europe), is minuscule compared to the contribution of the indirect cost (the widening gap between tax receipts and government outlays caused by the recession).
Many people on the left, by emphasizing the cost of bailing out financial institutions (and its contribution to sovereign debt build-up), target the wrong, and smaller, costs. There are two senses in which targeting the bail out funds is incorrect. First, the magnitude of those costs are small compared to the indirect costs. Second, if the direct costs had not been incurred, i.e., if the system continued to be organized around capitalist lines and the financial system had not been bailed out, the ensuing recession would have been deeper and hence the indirect costs, ultimately borne by the working and middle class people, even higher.
It is important to be clear that the workings of the financial sector under capitalism imposes enormous costs on the working and middle class people not only because it needs to be bailed out when the system hits the fan, as happened in 2008. The financial sector imposes much larger costs by the sheer magnitude of the externality of its actions on the working class, by the structural refusal to internalize the costs of its speculative activities, by increasing the financial fragility of the system when the bubble is inflating and ushering in the deep and prolonged recession that inevitably arrives when the bubble bursts. The direct cost of bailing out the financial system when the crisis breaks out is small compared to the indirect cost that comes from the externality of its casino-like activities. In fact, if the financial system had not been bailed out, the indirect costs would have been even higher because the recession would have almost certainly turned into a depression (of the magnitude that the world witnessed during the 1930s).
FIGURE 1: Time series plot of changes in the index of house prices in major US cities
(Source: http://www.project.org/info.php?recordID=445)
Let us study the US economy and try to understand the difference between the direct and indirect costs of the financial crisis of 2008-09. Recall that the the housing bubble in the US started deflating from around late 2006 (Figure 1). The securitization process that had built itself on the shaky foundations of the housing bubble started unraveling within a year, and the financial crisis broke out in real earnest in 2008. The financial system went into panic, credit markets froze (as banks stopped lending to each other and to nonfinancial firms) and this sent shock-waves through the US government and the Federal Reserve circles. Monetary policy had already kicked in at least an year ago, with the Fed slashing short term interest rates and making liquidity available to the financial system (see Figure 2). But this was clearly not enough.
FIGURE 2: Short term interest rates in the US
(Source: http://research.stlouisfed.org/fred2/graph/?id=FEDFUNDS)
To unfreeze credit markets and deal with the growing panic, the US Treasury department adopted the Troubled Assets Relief Program (TARP) in early October 2008. The conceptualization of the TARP went through two rounds. In the first round, the US Treasury argued that the TARP should buy out the toxic assets (i.e., assets that drew its value from the housing market like mortgage backed securities, the collateraized debt obligations, etc., and were now more or less worthless) from financial institutions to restore confidence in the financial markets and prevent widespread bankruptcies. Very soon it became clear that this strategy would not work because it was impossible to ascertain the “true” value of the toxic assets. In other words, it was not clear at what price the assets should be bought for by the US Treasury. Hence, this strategy was abandoned and in the second round of iteration, TARP was conceptualized as a recapitalization program. This entailed lending money (or other liquid assets like Treasury bills) to financial institutions but in return taking ownership shares of those institutions.
The bail out of the financial institutions that we now talk about is precisely TARP as a method to recapitalize financial institutions, in particular banks, credit market institutions, the automobile industry and the insurance giant AIG, by injecting fresh capital into their balance sheets in lieu of ownership shares. How much money was involved? Initially, TARP was thought to involve $700 billion. But, the Dodd-Frank Wall Street Reform and Consumer Protection Act reduced the maximum authorization for the TARP from $700 billion to $475 billion. The TARP ended on October 3, 2010 and had by then disbursed only a total of $411 billion. Of this, 77%, i.e., $318 billion, has already been recovered through repayments, dividends, interest and other income earnings of the US Treasury.
In fact, the part of TARP funds that was lent to banks has already been recovered with a profit: a total of $245 billion was invested in banks, and it has been recovered with a profit of about $20 billion. It is estimated that the overall cost of TARP, after all recoveries are taken into account, will amount to $70 billion, only about a tenth of the original amount of $700 billion. Hence, it is clear that the overall contribution of the TARP (the bailing-out of the financial system) to the deficit (and outstanding debt) of the US government is not large. The direct cost of the financial crisis, in terms of the funds required to bail out the financial system during the peak of the crisis, is not very large when compared to the indirect cost, to which we now turn.
FIGURE 3: Civilian Unemployment Rate in the US
(Source: Federal Reserve Bank of St Louis, http://research.stlouisfed.org/fred2/)
The indirect cost arose because of the magnification of the effects of a downturn into a deep and prolonged recession, the magnification being caused by the fragility of the financial system. Unemployment rates went through the roof and continues to be at historically high levels despite the official end of the recession in the second quarter of 2009; the labour force participation rates have fallen due to discouraged unemployed workers dropping out of the labour force; the median duration of unemployment has increased to extremely high levels; the share of long term unemployed workers has grown to postwar highs (see Figure 3 and 4 for some details).
FIGURE 4: Civilian Participation Rate in the US
(Source: Federal Reserve Bank of St Louis, http://research.stlouisfed.org/fred2/)
While it might be difficult to accurately quantify these losses, it seems clear that they are far higher than the $70 loss that the taxpayer will be saddled with due to the bail out of the financial sector. For instance, some studies suggest that about 7 million workers have been displaced from long-term employment during the Great Recession, only a subset of all workers who have been adversely hit by job losses. These 7 million workers will experience an income loss of about $774 billion over the next 25 years.
In a similar vein, the contribution of the direct investment from TARP to the growth of the fiscal deficit is small compared to the contribution due to the recession. Figure 5 plots the net outlays (i.e., net of interest payments of its debt) of the federal government, the receipts of the federal government and the difference between the two for the period 2006-2011. It can be seen from Figure 5 that the major jump in the deficit occurred between 2007 and 2009, a period during which it increased by about $1252 billion. This increase was the result of an increase in net outlays (i.e., expenditure) by about $788 billion and a fall in receipts of around $463 billion. Even assuming that the total $411 billion disbursed by the US Treasury for the TARP had occurred during that period (which it clearly did not), it is only about a third of the increase of the federal deficit during that period. Thus, close to (or more than) two-thirds of the increase in the federal government deficit was the result of non-bail out costs.
FIGURE 5: Deficit of the US Federal Government
(Source: Federal Reserve Bank of St Louis, http://research.stlouisfed.org/fred2/)
Looking at the plots of the outlays and receipts of the US federal government in Figure 5, we clearly see that the two series have diverged significantly since the start of the Great Recession. Even though net outlays (i.e., expenditures) have flattened out since 2010, receipts (i.e., tax revenues) have not picked up in any major way. Thus, the gap between the two continues to be big, in excess of $1000 billion every year. This huge gap is what lies behind the deficit and mounting debt of the US government, not the $70 billion that will be the net cost of the TARP. It is more or less certain that a similar account would be accurate for Europe also, i.e., the largest portion of the debt of Eurozone governments would be the result of indirect costs and not the direct cost of bailing out the financial sector during the crisis of 2008.
Conclusion
To conclude, let me summarize the argument. It is important to distinguish between the direct costs (i.e., bail out of the financial sector through the TARP) and indirect costs (rise in unemployment and the growth of the government debt due to the deep and prolonged recession) of the financial crisis and focus on the second rather than the first. This is because the second is much larger in magnitude than the first. In fact, it is not even clear that the first can be considered a cost because without bailing out the financial sector via recapitalization (or temporary and partial nationalization), the recession would certainly have been deeper, increasing the burden on the working people. In addition, concentrating on the second cost allows us to focus on the systemic aspect of the costs that the financial sector, in its speculative avatar, imposes on the working and middle class population of a country. This forces us to conceptualize an alternative that is likewise systemic in nature and goes beyond arguing against bail out of financial sector firms.
Deepankar Basu is an Assistant Professor in the Department of Economics, University of Massachusetts.
Posted by Deepankar Basu June 30, 2011 at 10:45 am in Economic Notes, Economy, Finance, Marxism, USA
Deepankar Basu
Between 1948 and 1973, real GDP for the U.S. (measured in 2005 chained dollars) economy grew at a compound annual average rate of about 3:98 percent per annum; between 1973 and 2010, the corresponding growth rate was only 2:72 per cent per annum. While the 25 year period of high growth after the Second World War has, with some justification, earned the epithet of the “Golden Age” of capitalism, the period of relative stagnation since the mid-1970s has been characterized by heterodox economists as a neoliberal capitalist regime (Dum´enil and L´evy, 2004, 2011; Harvey, 2005; Kotz, 2009).
Three characteristics of neoliberal capitalism have attracted lot of scholarly attention. First is the marked trend towards growing financialization of the economy, by which is meant a growing weight of financial activities in the aggregate economy. Figure 1 presents some well-known evidence, for the period 1961-2010, in support of this claim. The top left panel plots the share of value added that is contributed by the FIRE (finance, insurance and real estate) sector in the value added by the total private sector of the U.S. economy: between 1961 and 2008, the contribution of the FIRE sector increased steadily from about 16 per cent to roughly 25 percent. The top right panel gives the share of financial sector profit in total domestic profit income in the U.S. economy, which shows a steady increase since the early 1970s (interrupted briefly in the early 1980s). It is only during the financial crisis in 2007-2008 that this share declined for a brief period; it is noteworthy that the share started a rapid ascent in 2009, and has recovered much of its loss since then. The two figures in the bottom panel provide evidence, for the period 1988-2009, of the growing size of the stock market: both stock market capitalization and total value traded, as a proportion of nominal GDP, has trended up since the late 1980s, providing clear evidence of the growth of financial relative to real activity.
The second notable characteristic of the neoliberal regime has been the veritable explosion of the flow of credit (and the build-up of the stock of debt) in the economy. One important dimension of the growth of credit has been the unprecedented increase in the credit flowing to (working class) households. Figure 2 presents evidence in support of both these claims by plotting the time series of outstanding debt (measured as total credit market liabilities) of three crucial sector of the U.S. economy: the nonfinancial business sector, the household sector, and financial business sector. While the business sectors display an increasing trend since the early 1960s (along with large fluctuations at business cycle frequencies), the household sector debt starts a secular rise since the early 1980s (with almost no business cycle fluctuations), and the financial business sector also displays a secular rise till the onset of the Great Recession. The last chart in Figure 2 plots the time series of the ratio of outstanding household debt and outstanding debt of the nonfinancial business sector. The ratio shows a clear upward trend since the mid-1970s, with household debt increasing from about 85 percent of nonfinancial business debt in the mid-1970s to about 140 percent just prior to the start of the Great Recession.
The third important characteristic of neoliberal capitalism has been stagnation of real wages for the bulk of the working class. In the face of rising productivity, this has entailed a massive redistribution of income away from working class households, leading to widening income and wealth inequality. Figure 3 presents evidence in support of this claim. The top panel plots an index of productivity (measured real output per hour) in the total nonfarm business sector of the U.S. economy. There is an increasing trend in productivity over time, with a marked acceleration in growth since the mid-1990s. This is in sharp contrast to the evolution of real wages of production and nonsupervisory workers plotted in the bottom panel, who comprise about 80 percent of the U.S. workforce. The hourly real wage has barely increased between the early 1970s and the late 2000s; the weekly real wage has in fact declined during this period.
The main question that this paper wishes to explore is the possible connections between the slowdown in economic growth on the one hand and the three characteristics of neoliberal capitalism on the other? Heterodox economists have been interested in this question for at least the last three decades, and the main contribution of this paper is to extend that literature by presenting a theoretical model to address this question. Building on and extending Foley (1982, 1986a), this paper develops a discrete-time Marxian circuit of capital model to analyze the link between financialization, nonproduction credit and economic growth. It is demonstrated that increasing financialization and the growth of household credit (a component of nonproduction credit) can reduce the growth rate of a capitalist economy. Hence, this paper offers a novel explanation, rooted in a Marxian circuit of capital macroeconomic analysis, for the slowdown of the U.S. economy during the neoliberal era.
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Posted by Deepankar Basu April 18, 2010 at 8:01 am in Displacement, India, State Repression
Deepankar Basu, MRZine
Organized by a collective of civil society groups, social movements, progressive academics, social activists, and concerned citizens, the recently concluded Independent People’s Tribunal (IPT) on Land Acquisition, Resource Grab, and Operation Green Hunt in New Delhi offers a unique perspective into contemporary Indian reality. While the national and international media talk profusely about the unprecedented growth of the Indian economy, as measured by growth of the gross domestic product, it shies away from looking at the underlying costs of that growth: increasing inequality, forced displacement and dispossession of the already vulnerable, growing social tensions, and a rapidly growing State terror. The IPT, by giving space to different activist voices from the grassroots, offers a much-needed alternative perspective on the growth process, a view, in a sense, of the dark underbelly of current-day Indian "development."
Running for three days, from April 9 to April 11, the IPT heard accounts of diverse grassroots activists from the states of Chhattisgarh, Orissa, West Bengal, and Jharkhand, the theater of an insidious war — nicknamed Operation Green Hunt (OGH) — that the Indian State has launched against its own people. Supplementing activist accounts and testimonies of witnesses with critical insights and advice of social scientists, journalists, legal experts, former government functionaries, and human rights activists, the people’s jury of the IPT made its opinion known through its interim observations and recommendations, the most urgent of which was to stop OGH and initiate a process of dialogue with the local population in the affected areas.1 Other recommendations included: immediately stopping all compulsory acquisition of agricultural or forest land and the forced displacement of the tribal people; making the details of all the memorandum of understanding (MOUs) signed for mining, mineral, and power projects known to the public; stop victimizing and harassing dissenters of the government’s policies; withdraw all paramilitary and police forces from schools and hospitals; constitute an Empowered Citizen’s Commission to investigate and recommend action against persons responsible for human rights violations of the tribal communities.2
Why has the Indian State launched OGH? Why was the IPT organized? Who participated in the deliberations of the IPT? To address such questions, and therefore to understand the true import of the IPT, we need to step back a little and locate the ongoing war in the context of the political economy of contemporary India.
The Context
The announcement of the IPT and the interim observations of the people’s jury set out the context in clear-cut terms. The neoliberal turn in the economic policies pursued by the Indian State since the mid 1980s has, in line with similar experiences in the rest of the world, spelt unmitigated disaster for the vast masses of the country. While a small section of the population has increased its income, wealth, and social power at unimaginable speed and to preposterous levels, the majority of the population has continued to live in absolute poverty, marked by widespread hunger, malnutrition, and lack of access to even the most basic health and educational infrastructure necessary to guarantee a decent standard of living.
In 2009, India had 52 billionaires, about double the corresponding number in 2007. The wealthiest Indian, Mukesh Ambani, has a net worth of $ 32 billion; the combined net worth of the richest 100 Indians in 2009 was US$ 276 billion. On the other side of the social pyramid, about 77 per cent of Indians spent less than $2 (in PPP terms) on daily consumption expenditure in 2004-05 and roughly 80 per cent of Indian households did not have access to safe drinking water.
Not only has the neoliberal economic paradigm meant increasing disparities; it has also meant dispossession and pauperization for already vulnerable sections of the population, noted the interim observation of the people’s jury. This is because a key component of the neoliberal paradigm in India has been the attempt to foster unprecedented levels of State-assisted resource grab by big Indian and foreign capital. What a Ministry of Rural Development report itself termed the biggest resource grab since the time of Columbus, has gradually encompassed arable (often extremely fertile and multi-cropped) land, forest land, mineral resources, and water and has resulted in forcibly cutting off access of the poor and marginalized sections to virtually all forms of common property resources. Coming on top of the five-decade-long "development disaster" of the Indian state, this forcible exclusion from access to common property resources has increased the economic vulnerability of the poor to unprecedented levels.
The current phase of this unprecedented resource grab has been concentrated primarily in the forested regions of Central India, stretching from Chhattisgarh all the way to Jharkhand and West Bengal, which house enormous amounts of mineral resources like iron ore and bauxite. Big corporate houses with interests in mining, minerals, and power industries like Tata, Essar, Vedanta, POSCO, and others have lined up to appropriate these resources for quick economic gains, paying least attention to the enormous environmental and human costs inherent in their ventures. The state governments have welcomed these corporate houses with open arms by signing unknown numbers of memorandum of understandings (MOUs) whose details have not been made public, despite repeated requests by activists and the local population.
But the forested regions of Central India house not only mineral resources corporate capital is desperately after; the region is also home to a large section of the roughly 100-million-strong indigenous population, referred to as adivasis, of the country. To get at the resources, the tribal population needs to be moved, the area needs to be vacated; in Chattisgarh, according to some reports, 300,000 adivasis have already been forcibly displaced, some of whom have moved into the bordering state of Andhra Pradesh and while others have fled into the forests. That is the source of the current conflict: the Indian State, acting clearly in the interests of corporate capital, have decided to forcibly drive out the local indigenous population from this region.
The adivasi population, quite naturally, have resisted this move of the State, using all possible means at their disposal. Drawing on the Fifth Schedule of the Indian Constitution, which is especially devoted to delineating adivasi rights and laying out special provisions for their protection and endogenous development, adivasi activists have attempted to challenge the government’s move. They have even taken recourse to the Panchayat Extension to Scheduled Areas (PESA) Act of 1996 and the Forest Rights Act of 2006, legislations — earned through years of arduous struggle — that have attempted to give more substance to the original impulse of the Fifth Schedule.
Instead of addressing the genuine grievances of indigenous population facing forcible displacement and dispossession, the State has, in flagrant violation of the letter and intent of the Indian Constitution, cracked down on their legitimate protests. Peaceful resistance movements across this region have been met with police brutality and the military might of the State, forcing, in turn, the arming of the resistance movement. State-assisted vigilante groups like the Salwa Judum in Chhattisgarh and Harmad Bahini in West Bengal were the first response of the state to the armed resistance of the adivasis. When that failed, Operation Green Hunt, a further escalation and militarization of the State’s response, took shape. That, in brief, is the context in which the IPT was organized.
The Participants and the Discussion
Mindful of this ominous context and after hearing the testimonies of participants from various corners of the country, the distinguished people’s jury — comprising former justices H. Suresh and P. B. Sawant, scientist and former member of the National Security Council P. M. Bhargava, former UGC chairman Professor Yash Pal, former chairperson of the National Commission for Women Mohini V. Giri, and retired IPS officer Dr. K. S. Subramanian — recommended stopping OGH and the compulsory acquisition of agricultural or forested land, making details of all MOUs public, and rehabilitating all displaced adivasis.3
While the inaugural address was presented by noted environmental activist Vandana Shiva, the people’s jury was introduced by well-known advocate Prashant Bhushan. The inaugural session also saw presentations by Mr. S. P. Shukla and Dr. B D Sharma, a retired civil servant and ex-chairman of the SC/ST Commission. The latter, in particular, drew attention, based on years of ground-level activism in tribal areas across the country, to the utter and long-term failure of the Indian State to uphold the rights of indigenous people as a result of violations of provisions guaranteed by the Fifth Schedule, the PESA Act of 1996, and the Forest Rights Act of 2006.
The second part of the first day focused on the current situation in Chhattisgarh marked by atrocities of the police and Sulwa Judum SPOs (members of a brutal State-supported vigilante group), regular torture, killing, rape, interrogation, and illegal detention for being alleged Maoist supporters. Speakers included lawyer and human rights activist Sudha Bharadwaj of the Chhattisgarh Mukti Morcha, human rights activist Goldy M. George, Gandhian acivist Himanshu Kumar (whose Ashram was demolished by the administration in Chhattisgarh), world-renowned doctor and activist Binayak Sen (who had been jailed for two years in Chhatisgarh without any charges), and democratic activist Harish Dhawan of the People’s Union for Democratic Rights, and Lingaram, who had himself been tortured and forced to join the Salwa Judum.
The second day of the IPT saw presentations from Jharkhand and West Bengal. Speakers on the Jharkhand session included: Dr. Alex Ekka, Prem Varma, James Topo, tribal rights activist Gladson Dungdung, Dr. Bani from the Azadi Bachao Andolan, Radha Krishna Munda from the Jharkhand Jungle Bacha Andolan. Speakers at the West Bengal session included human rights activist Sujato Bhadra of the Association for the Protection of Democratic Rights, activist and academic Partho Sarathi Ray of Sanhati, and grassroots activists Montu Lal and Gajen Singh.
Running through all the days of the proceedings, there was also discussion about the attempts to silence every form of dissent, as part of the OGH, in urban areas, by clamping down especially on dissenting voices of urban activists who are opposing the neoliberal policies of the government. Activist Abhijnan from West Bengal, Sujato Bhadra of the Association for the Protection of Democratic Rights, and Kavita Srivastava of the People’s Union for Civil Liberties spoke specifically about incidents of arrests, detentions, and human rights violations including denial of the right of activists to medical treatment while in custody (often under draconian laws).
The third and final day saw presentations on Orissa — with the main speakers being activist Praful Samantra, Abhay Sahu of the anti-POSCO movement, and Lingaraj Azad — and critical interventions by several eminent personalities including writer and activist Arundhati Roy, journalist Shoma Chaudhury, Bianca Jagger, Arun Aggarwal, civil rights activist Kavita Srivastava, and Advocate Shanti Bhushan. The IPT ended with the presentation of the interim observations and recommendations of the people’s jury.
What Is the Message?
All the presentations, though differing in terms of details, drew attention to two closely related facts. First, the current process of growth and "development" in India rests crucially on the forced displacement and dispossession of a sizable section of the indigenous population and peasantry; this process has key resemblance to what Marx had termed the primitive accumulation of capital. Second, any and every resistance to this State-assisted displacement and dispossession is met with military force, again harking back to the brutalities of primitive accumulation in England. Forced displacement, dislocation, and dispossession of the already vulnerable, systematic violations of their rights guaranteed by the Constitution, and an attack on any form of dissent which challenges the State’s policies are, thus, the festering wounds on the stinking underbelly of the current phase of Indian "development." This is probably what the proceedings of the Independent People’s Tribunal (IPT) on Land Acquisition, Resource Grab, and Operation Green Hunt wanted to draw the attention of the world that is so enamored with Indian economic growth.
But will the government heed the advice of the IPT? If past experience is anything to go by, the depressing answer is a resounding no. People’s tribunals are regularly organized the world over to highlight important social, economic, and political issues that affect the lives of ordinary people. India has also witnessed people’s tribunals in the past, the results of which have not only been totally ignored by the State but have even been used to harass their organizers.
Running for four days in Jawaharlal Nehru University, Delhi in September 2007, the Independent People’s Tribunal on the World Bank Group in Asia heard testimonies about the damage done by the policies of the World Bank across 26 sectors of social and economic development in India.4 A thirteen-member panel consisting of international jurists, renowned economists, prominent scientists, retired government officials, and social and religious leaders found the World Bank guilty of harming the environment and lowering the standard of living for most Indians.5 The findings of the people’s jury were released as a report on September 11, 2008, a year after the tribunal’s proceedings. Did the government change course because of the recommendations of the jury? My guess is as good as anybody else’s.
An even more outrageous case is the recent harassment and intimidation of human rights activists for highlighting the issue of custodial torture by the police. Kirity Roy, Secretary of the Banglar Manabadhikar Suraksha Mancha (MASUM) — a human rights organization in West Bengal — was arrested by the Kolkata police on 7 April 2010, and later released on bail, for organizing a People’s Tribunal on Torture on the June 9-10, 2008 in Kolkata.6 Instead of applauding the work of organizations like MASUM, who are doing public service by highlighting human rights violations of ordinary citizens, the move to arrest its activists and harass them in all possible ways tells a lot about the real intentions of the government. While both Human Rights Watch7 and Amnesty International8 have demanded that the Indian government drop all charges against Kirity Roy and others involved in organizing the People’s Tribunal on Torture, it is doubtful that the government will heed this sage advice unless pressured by citizens’ campaigns.
Given the absolutely negative attitude of the government in dealing with dissent of any kind, it is doubtful that it will heed the advice of the jury at the Independent People’s Tribunal (IPT) on Land Acquisition, Resource Grab, and Operation Green Hunt and call off its war on the tribal people. If this be so, then it must also take note of the warning that the IPT ended its interim observations with:
Even peaceful activists opposing these violent actions of the State against the tribals are being targeted by the State and victimized. This has led to a total alienation of the people from the State as well as their loss of faith in the government and the security forces. The Government — both at the Centre and in the States — must realize that its above-mentioned actions, combined with total apathy, could very well be sowing the seeds of a violent revolution demanding justice and rule of law that would engulf the entire country. We should not forget the French, Russian and American history, leave aside our own.
1 "Independent Tribunal Wants Operation Green Hunt to Stop," Indian Express, 12 April 2010.
2 "’Stop Operation Green Hunt,’"The Hindu, 13 April 2010.
3 Announcements, daily press releases, and the text of the jury’s interim observations and recommendations can be found on alternative media forums like Sanhati and Radical Notes.
4 "Independent People’s Tribunal on World Bank Gets Underway in Delhi," Bank Information Center, 22 September 2007.
5 "Independent People’s Tribunal Report Charges World Bank," BanglaPraxis, 29 October 2009.
6 "Kolkata — Prominent Human Rights Activist Kirity Roy Arrested," Sanhati.
7 "India: End Harassment of West Bengal Activist," Human Rights Watch, 9 April 2010.
8 "India: Government of West Bengal Must Drop False Charges against Activists Campaigning against Torture," Amnesty International, 9 April 2010.
I would like to thank Partho Sarathi Ray and Pinaki Chaudhury for useful comments on an earlier version of this article.
Deepankar Basu is Assistant Professor of Economics at the University of Massachusetts, Amherst.
Courtesy: MRZine
Posted by Deepankar Basu February 28, 2010 at 7:45 am in Economic Notes, Economy, Finance
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.
TOP US INCOMES OVER THE CENTURY
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.
CHART 1
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.
TOP OF THE TOP
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.
CHART 2
EVOLUTION OF WAGE INCOME
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!
CHART 3
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.)
REFERENCES
[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.
Posted by Deepankar Basu November 27, 2009 at 10:23 pm in Economic Notes, Economy, India, Poverty
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?
Posted by Deepankar Basu November 24, 2009 at 10:01 pm in Economy, India, Labour, Marxism, Working Class
Deepankar Basu, Sanhati.
In a previous paper [Basole and Basu (2009)] an attempt to begin an analysis of social classes in contemporary India organized around the idea of economic surplus was initiated, by revisiting the 1970s mode of production debate. The focus in Basole and Basu (2009) was on the rural classes and the unorganized industrial and service sector workers. In this paper, I extend that analysis by shifting attention to the classes that had been left out in Baole and Basu (2009): the industrial bourgeoisie and what might be called the middle class.
Introduction
In the Marxist tradition, the notion of class is intimately related to the idea of economic surplus. Thus, I would like to begin this paper with a few brief and introductory comments on the relationship between the two. Every society, if it is to reproduce itself over time, must organize social production in such a way that it manages to reproduce the material and non-material conditions of its existence. Production in excess of what is necessary to reproduce the material conditions of its existence is the production of what we can call economic surplus. Thus, a society produces economic surplus when it produces more than what is necessary to cover the costs of social production, i.e., when it produces more than is necessary to replace (or replenish) the labour and non-labour inputs used up in the production process. This allows us to divide the total labour time of society into two parts: necessary labour time, which corresponds to the labour time required to merely replace the labour and non-labour inputs to production; and, surplus labour time, which corresponds to the economic surplus.
It is the economic surplus, moreover, that allows any society to grow and develop, to not only increase the scale, scope and sophistication of material production and encourage and facilitate technological change but also to increase the scale and depth of its non-material products. Every viable, growing society, therefore, must produce an economic surplus to sustain its material and non-material growth.
Of course, reproduction of a society requires not only the continuous production of an economic surplus but also the reproduction of its social relations of production. While the problem of the reproduction of the social relations of production is an important one and deserves serious study, here I would like to draw attention to another, though related, issue: the relationship between economic surplus and class.
What is class? Here I can do no better than give a fairly comprehensive definition of class by Lenin:
“Classes are large groups of people differing from each other by the place they occupy in a historically determined system of social production, by their relation in most cases fixed and formulated in law to the means of production, by their role in the social organisation of labour, and, consequently, by the dimensions of the share of social wealth of which they dispose and the mode of acquiring it. Classes are groups of people, one of which can appropriate the labour of another owing to the different places they occupy in a definite system of social economy” (Lenin 1919 (1972), p.421).
Thus, classes, as understood in the Marxist tradition, are defined by the appropriation of the surplus labour time of the group of direct producers by the group of non-producers (or exploiters). This appropriation is made possible by the differential location of the classes in the process of social production and the differential ownership of the means of production. The appropriation is guaranteed by the existing legal system enforced through the power of the State.
But if classes are defined by the appropriation of surplus, then they can only come into existence when the productive capacity of society has progressed to the extent that it can produce a surplus over and above what is needed for bare subsistence. Thus, class-divided societies are made possible and materially supported by the existence of economic surplus, corresponding to the surplus labour time of direct producers.
Being defined by the relationship between exploiters (those who appropriate the surplus) and exploited (those who produce the surplus), class-divided societies have often been studied with two-class models: master and slave, serf and lord, worker and capitalist. It is of course clear that two-class models arise as abstractions from the more complex class structures of real societies; the presence of groups which lie in the “middle” of, or straddle, both class locations, i.e., exploited and exploiters, needs to be taken into account to arrive at a more realistic class analysis of real societies. Before proceeding to take account of the “middle” in Indian society, it needs to be reiterated that even though two-class models are simplified representations of reality, they are useful for understanding the basic dynamics of the societies they refer to at a high level of abstraction. For instance, Marx’s analysis of the dynamics of capital accumulation presented in Capital, Volume 1 (Marx, 1992), where he works primarily in terms of two fundamental social classes – the proletariat and the capitalists – is extremely useful in understanding the long term tendencies of capitalist societies.
With these preliminary comments in place, let me propose the following three-class typology as a first approximation to the class structure of contemporary India: the working classes, the ruling classes and the middle classes, the plural being used to draw attention towards the internal heterogeneity of each of these three classes.
Three Fold Classification for India
The working classes are the only productive classes in Indian society and are defined by the fact that they produce the economic surplus in the following specific sense: the income that accrues to this class, which is equal to the value of its labour-power, is lower than the value added by the use of that labour power during any period of time (say a year). Taking account of the internal heterogeneity of the working class in India, it can be broadly divided, with two important qualifications, into two large groups: (1) the unorganized workers (i.e., workers in the unorganized sector of the economy) as defined by the National Commission for Enterprise in the Unorganized Sector (NCEUS), and (2) productive workers in the organized sector of the economy. The first qualification relates to the fact that the NCEUS defines the unorganized workers to include almost all of the agricultural sector; hence we must exclude the following two rural classes from the NCEUS definition of the unorganized workers: (a) rich farmers and landlords, and (b) middle peasants. The second qualification relates to a tiny portion of the workers in the organized sector whom we will include in the middle class and not in the surplus-producing working class, viz., the highly skilled workers, the professionals, the managers, and all the employees of the State sector. Thus, in India, the working class consists of: (1) the landless labourers, (2) the marginal and poor peasants, (3) the workers in the unorganized industrial and service sectors, and (4) a large part of the workers in the organized private sector.
At the other pole of Indian society resides the dominant, or ruling, classes. These classes are defined by the fact that they not only appropriate the economic surplus (that has been produced by the working classes defined above) but also determine the direction and mode of its utilization. For historical and structural reasons, the ruling class combine in India has been, and still is, internally heterogeneous and consists of the following three elements: (1) the industrial bourgeoisie, (2) the rich farmers and landlords, and (3) the professionals (State-elite, i.e., the top-level managers of PSUs, the top-level officers of the bureaucracy, the police, the army and the judiciary, and the top-level managers and professionals in the private sector). The industrial bourgeoisie is the dominant element in the ruling class combine.
Lying between these two poles, the productive and the non-productive poles, is what we might call the “middle class” which is defined by the following two characteristics: (1) this class is the recipient of a part of the economic surplus, i.e., the total compensation earned by the middle-class is higher than the value of its labour power (i.e., the cost of producing and reproducing the labour power); and (2) the middle class is crucial for the reproduction of the existing social relations in India which is what fetches it the extra income, i.e., the income above the value of its labour power, in the form of rent from the ruling classes. There are two main segments of the middle class: (a) the petty bourgeoisie, who largely own their means of production: middle peasants in agriculture, the merchants, the traders, and the owner-operators of small enterprises, and (b) the professionals: the technical experts, the managers, and the skilled workers in large-scale private enterprises, and the large majority of the employees of the State sector.
Basole and Basu (2009), by revisiting the 1970s mode of production debate, attempted to begin an analysis of social classes in contemporary India organized around the idea of economic surplus. The focus in Basole and Basu (2009) was on the rural classes and the unorganized industrial and service sector workers. In this paper, I extend that analysis by shifting attention to the classes that had been left out in Baole and Basu (2009): the industrial bourgeoisie and what might be called the middle class. But before moving on to an analysis of the industrial bourgeoisie and the middle class, let me briefly summarize the findings of Basole and Basu (2009) about the rural classes and the unorganized workers.
The main input into agricultural production is land and so the analysis of property and power in the agricultural sector has to carefully look at the ownership distribution of land. While the aggregate distribution of land ownership remains as skewed today as it was five decades ago, interesting and important patterns are visible within this unchanging aggregate picture. The share of land owned by large (10 ha or more) and medium (4 ha to 10 ha) landholding families has steadily declined over the last few decades from around 60% to 34%; the share owned by small (1 ha to 2 ha) and marginal (less than 1 ha) landholding families has increased from around 21% to 43%, while the share of semi-medium (2 ha to 4 ha) families has remained unchanged at around 20%.
Going hand-in-hand with the decline in the share of land owned by large landowning families, is the steady decline of tenant cultivation and its gradual replacement by self cultivation in Indian agriculture. The share of operational holdings using tenant cultivation declined from about 24% in 1960-61 to about 10% in 2002-03. There are large geographical variations in the extent of tenancy, with the largest share of leased-in land as a share of total operated area occurring in Punjab and Haryana, two prominent examples of what Basole and Basu (2009) called large landholding states; Orissa has high prevalence of tenancy and is an example of a small landholding state. The proportion of area owned and the proportion of area operated by the different size-classes are almost equal; hence, there is no evidence of reverse tenancy on any substantial scale at the aggregate level, though this might hide reverse tenancy at state or regional levels.
Disaggregating total incomes of rural households engaged in agriculture according to types of income showed that wage income has become the main source of income for a large majority of the population. For about 60% of the rural households in 2003, the major share of income came from wage work, supplemented by income coming from petty commodity production, both in the agricultural and non-agricultural sector. Another 20% of rural households drew equal shares of their total income from wage work and cultivation, both at about 40%. The natural corollary to this is that “effective landlessness” is large and has steadily increased over the past few decades. The share of effectively landless households in total rural households has increased from about 44% in 1960-61 to 60% in 2002-03.
These, and other related, facts led Basole and Basu (2009) to conclude that: (a) the hold of semi-feudal landlords had declined significantly over the past few decades; thus, the primary element of the rural ruling class today seems to be the rich farmers; (b) there has been a significant growth of the rural proletariat, and (c) the prevalence of petty production, in agriculture, industry and services, remains undiminished; hence the petty bourgeoisie remains numerically and politically important; (d) the vast majority of the industrial proletariat is seen in India today as unorganized workers, who lack social security, work security and employment security (NCEUS, 2007). Let us now turn to a study of the industrial bourgeoisie and the middle classes.
The Industrial Bourgeoisie
The dominant element in the ruling class combine is the industrial bourgeoisie, which emerged and grew under the long shadow of British colonialism. Accumulating capital through merchant and trading activities related to the colonial economy, this class gradually diversified into industrial activities, beginning with the textile industry in an around colonial Bombay. Significant portions of the industrial bourgeoisie has been, and continues to be, organized along family lines, with the Tatas and the Birlas being the most prominent historical examples. Three characteristics of the Indian industrial bourgeoisie demand further analysis and comment: its attitude towards other elements, especially the semi-feudal landlords, of the ruling class combine; the evolution of its internal structure and its relationship with the State; and, its relationship with the center of the global capitalist system.
The Indian bourgeoisie has, because of its historical origins, always had an ambivalent attitude to the whole gambit of semi-feudal interests in the economy. Even though it hesitantly supported the nationalist leadership of the Indian National Congress, it was never strong enough to push for its hegemony either in the nationalist movement or in the post-colonial State. It never fought a frontal battle with feudal interests, the biggest indicator of which is the half-hearted nature of land reforms in independent India. As a result, it could neither fashion an independent capitalist development path for the country based on the home market nor consistently democratize the polity. If the nationalist struggle for independence is, therefore, understood as the beginning of the bourgeois democratic revolution in India, then it largely remains unfinished even 60 years after political independence from British colonialism.
Even though the Indian bourgeoisie has not initiated and led a broad-based capitalist development, which could have improved the material conditions of the vast masses of the country, it has nonetheless managed to significantly widen and deepen the industrial structure of India. Starting with consumer goods industries like textiles, it has diversified into the production of basic capital and intermediate goods, and consumer durables. This has been largely possible because of the protection and patronage of the State, with which this class has had a complex relationship. On the one hand, it has resisted all attempts at disciplining by the State for larger development programmes (Chibber, 2006); on the other, it has utilized industrial, tax, credit, export and import policies of the State to further its own narrow class interests.
At the time of political independence, the industrial structure in India was very concentrated at the top, with a few large monopoly business houses controlling large swathes of the market. Three trends have emerged, slowly at first, since then. The first trend has been the differentiation of the economy into an organized and an unorganized sector, roughly coterminous with large and small scale industries; policies of the Indian state helped in this differentiation. The second trend has been the relative growth and proliferation of the small scale sector, i.e., relative to the large-scale, organized sector. The third trend has been the slow but steady growth of a regional bourgeoisie, different from and often competing with the established large business houses. Thus, concentration and centralization of capital has proceeded in several branches of the organized sector; but this has also been accompanied by increased regional and sectoral competition and growth of the small scale sector.
To get a sense of the evolution of the concentration of Indian capital at the very top let us look at some data. In 1971, total sales of the top 20 industrial houses in India accounted for about 61 percent of the net domestic product of the private organized sector; the corresponding figure for 1981 was 87 percent (Bardhan, 1998). To come to the situation in the early part of this century, note the continued dominance of what the business press regularly calls the “big four” of Indian business: the Tatas, the Birlas, the Ambanis and the Mittals. In key industries like energy, telecom, steel, automobiles, IT and retail, these four business houses either continue to dominate or are poised to do so in the near future. Another measure of the concentration of Indian capital at the top can be seen from the following: according to data from the ET 500, in 2008 the top 20 private companies accounted for about 40 percent of the sales, 47 percent of after-tax profits and 45 percent of market capitalization of the top 500 private companies. Though not strictly comparable with the earlier data for the 1970s and 1980s, the data about 2008, when situated in a historical setting, suggests the following: the monopoly power of Indian big capital increased continuously after political independence till the mid-1980s, and has seen a relative decline since the inception of the process of economic liberalization.
While Indian capital continues to be highly concentrated at the top in many industries, we notice another trend too: regional capital has grown by leaps and bounds over the past two decades and has made serious forays into industries such as automobile ancillaries, capital goods, casting and forging, chemicals, construction, diamond and jewelery, entertainment and media, textiles and transportation and many others.
The relationship of Indian capital to the center of the global capitalist system has been the focus of much debate and discussion within left circles in India with one prominent strand characterizing the big bourgeoisie as comprador and the Indian state as semi-colonial, both these characterization meant to convey the continuing hold of foreign capital on the Indian economy and polity, especially since the beginnings of the 1990s. Concrete evidence regarding the presence of foreign capital in the Indian economy and the continuous overseas expansion of Indian capital seem to suggest a more complicated story.
Let us first look at the evidence on the presence of foreign capital in the Indian economy. In 1981-82, “only about 10 per cent of total value added in the factory of mining and manufacturing was accounted for by foreign firms.” (Bardhan, 1998); if only large firms are kept in the picture, foreign firms still account for only about 13 per cent of the value added. Of course, there were a small number of industries where foreign presence was substantial: industries producing cigarettes, soap and detergents, typewriters, electrodes, etc. To the extent that there was a rise of foreign collaboration during this time, “the overwhelming proportion of such agreements [did] not involve any foreign participation in equity capital.” (Bardhan, 1998). Similarly, there has been an increasing trend of outright purchase of technological imports thereby reducing the dependence of domestic capitalists on the foreign suppliers of technology. Of the top 25 industrial units in 1983, only 4 were foreign.
The contemporary picture is tilted even more towards the domestic bourgeoisie. Of the top 500 companies in 2008, only 2 were foreign: Larsen & Tubro and Maruti-Suzuki; if we restrict ourselves to only private companies, then the corresponding figure is 3 out of the top 25: Larsen & Tubro, ITC and Maruti-Suzuki. If we look at the same issue at a more disaggregated level, there are only three major industries which has substantial foreign capital: capital goods (Larsen & Tubro), fast moving consumer goods (ITC and Hindustan Lever), and retail (Pantaloon retail). Other than these three, all the major industries are controlled by Indian capital: automobiles, banks, chemicals, construction, consumer durables, entertainment, fertilisers, finance, metals & mining, oil and gas, pharmaceuticals, power, real estate, steel, textiles, transportation (ET 500, 2008).
The overseas expansion of Indian capital in recent years has been commented on a lot, especially in the ecstatic business press in India. Some of the prominent examples that have been splashed across the national media are: Videocon’s acquisition of South Korea’s debt-burdened Daewoo Electronics; Tata’s acquisition of Corus; ONGC Videsh’s acquisition of Exxon Mobil’s stake in the Campos Basin Oil Fields in Brazil; Suzlon Energy’s acquisition of Belgium’s Hansen Transmissions International NV; Ranbaxy’s acquisition of Terapia, the largest independent generic drug company in Romania; Wipro’s acquisition of United States-based Quantech Global Services; and the largest acquisition of all, Reliance’s reported move to acquire controlling stake in LyondellBasell, the world’s third largest chemical company. Going beyond such anecdotal evidence from the business press, there is substantial evidence based on detailed research that major fractions of Indian capital, with active assistance from the State, has successfully entered the global scene. Researchers have pointed out that Indian investments abroad has moved through two stages. During the first stage of the 1970s and 1980s, the quantity of investments was small, and the destination was primarily in the developing world, shifting from Africa to Southeast Asia. During the second phase, starting roughly from the mid 1990s, there has been a dramatic quantitative increase of outward flow of capital, accompanied by a widening breadth and depth of industries where investment has been directed to; interestingly, in this phase, an increasing share of the investment have found destinations in the imperialist core: USA and Europe. (Pedersen, 2008).
Thus, taking account of these recent trends, viz., growing concentration and centralization of capital in certain key sectors of the Indian economy, the rise and growth of the regional bourgeoisie, and the increasing overseas expansion, especially into the core of the global capitalist system, it seems that the characterization of the big bourgeoisie as “comprador” and the Indian state as semi-colonial needs to be seriously rethought. What this implies is not the absence of imperialism but a suggestion to carefully rethink how imperialism operates in the Indian context, i.e., to rethink how the Indian economy is articulated to the global capitalist system by imperialism. Two issues that might be helpful in this context, and needs to be explored further, are the following: (a) the role and effect of financial capital (i.e., flows of portfolio capital as opposed to direct foreign investment) on the Indian economy, and (b) the possible influence of imperialism operating through the channels of government policy rather through the channel direct investment, i.e., export of ideas replacing the primacy of the export of capital à la Lenin. Next, we look at the middle classes.
The Middle Class
What I have called the middle class, for lack of a better expression, is composed of two distinct segments in contemporary India, the petty bourgeoisie and the professionals (technical experts, managers, skilled workers scientific personnel and state sector employees). The first segment of this class owns its means of production and thus, does not produce, surplus value; the second segment, on the other hand, receives a small portion of the total surplus value due to their crucial position in the production process and their important role in the reproduction of the existing social relations.
The petty bourgeoisie owns its means of production and, therefore, does not need, in the main, to sell its labour power for ensuring its livelihood. In the agricultural sector, the petty bourgeoisie refers to the middle peasants, i.e., families whose main source of income is cultivation and who mainly rely on family labour for organizing cultivation. In the industrial and service sectors, the petty bourgeoisie refers to owner-operators of small enterprises operated mainly with family labour and the small traders and merchants. There is internal differentiation within the petty bourgeoisie, with one section managing to produce surplus and accumulating capital while the other part lives perpetually in poverty, barely managing to reproduce themselves at a constant level of operation.
The privileged position of the professionals in the production process can be better understood if we focus on two crucial dimensions of the production process: skill and expertise, and exercise of authority in the production process. The analysis of professionals in this paper draws heavily on the pioneering work of Marxist sociologist Erik Olin Wright (Wright, 1997).
Let us consider authority first by looking a little more carefully at the production process. Capitalists not only hire labour in the market, but also dominates labour in the production process relating, for instance, to the pace, intensity and other dimensions of work; this aspect of power and control of capital by labour is crucial. As the scale and scope of production increases it becomes increasing difficult for capitalists to carry out this function; hence, they delegate this function to the class of managers and supervisors: managers and supervisors exercise the authority of capital over labour in the production process on behalf of capital. Thus, this dimension of delegated authority is one crucial dimension along which working people are differentiated, creating a contradictory class position: managers and supervisors can be seen as belonging both to the capitalist class and the working class. To the extent that they exercise the delegated authority of capital in the process of production, they act as capitalists; to the extent they are themselves controlled by capitalists, they resemble workers. There is, of course, a whole range of such contradictory class positions with lower level supervisors strongly resembling workers and top level managers, like corporate directors and CEOs, identifying completely with capital.
How do capitalists, in turn, monitor and control the managers and supervisors? Thinking about this question gives us a way to explain the earnings differentials, compared to the working class, of managers and supervisors. For the smooth functioning of the production process and the continuous generation of surplus value, capital needs managers and supervisors to exercise the power and authority over workers in an effective manner. This cannot be ensured by surveillance and monitoring of managers, both because it is difficult to monitor managerial effort and because coercive methods hamper creative managerial intervention. The alternative is to pass off a part of the surplus value to the managers so as to build loyalty of the managers towards the organization, internalize the imperatives of capital and thereby do capital’s bidding effectively in the production process. This part of surplus that goes to the managers and supervisors, and explains the huge differentials in earning from the working class, can thus be understood as a “loyalty rent”that capital pays to maintain its power and control in the production process.
Let us now turn to the other dimension: skill and expertise. Much like the class of managers and supervisors, workers who manage to acquire skills and expertise relevant to the production process attain a privileged position. There are two aspects of this privileged position. First, not only are skills always in short supply but there are systematic obstacles to the acquiring of these skills by members of the working class which often operates through the monopoly of the middle class on the educational system and training programs. This allows skilled and technical workers and the so-called experts to derive a “skill rent” from capital, which partly explains the wage differential vis-a-vis the working class and is an indicator of their privileged position. Second, technical and skilled work often cannot be effectively monitored; hence, capitalists generate optimal effort from skilled and technical workers by building up their loyalty to the organization, again through a part of the surplus being passed off as a “loyalty rent” to the skilled workers.
Among what we have called professionals, there is a special category that deserves separate attention: state sector employees. There are two characteristics of this group that deserves mention. First, their income comes from the tax revenue of the State, and thus can be easily seen to be a part of economic surplus of society; their income is thus a deduction from the surplus, they do not produce surplus in the sense in which workers produce surplus value for the valorization of capital. But this also means that they are not dependent on capitalist profit making for their livelihood; this might have important implications in terms of class consciousness vis-a-vis capitalism. Second, following Wright (1997), the various institutions of the state can be broadly divided into two parts, the political superstructure and the decommodified state service sector. The political superstructure consists of all the institutions that work for the reproduction of the existing social relations: the police, the courts, the military, the legislature and other such institutions. The decommodified state service sector, on the other hand, produces use values, and not exchange values, directly beneficial to the people at large: health care, educational services, public infrastructure and utilities, public recreation and entertainment, etc. The rationale for separating the two sets of institutions is that the second, the decommodified state service sector, operates largely outside the logic of commodity production and capital accumulation. Production in this sector is not subordinated to the imperatives of profit maximization; hence, this sector can be viewed as part of the institutional set-up of a post-revolutionary State and hence would need to be preserved even when the current configuration of power is dismantled. The political consciousness and orientation of workers working in these two sectors of the State might be expected to be radically different, a point of particular relevance to radical mass movements.
It goes without saying that there is a gradation of the middle classes, and the upper sections merge into the ruling class while the lower sections are very close to the working classes. The upper sections of the middle class share in the decision-making process relating to the use of the economic surplus (CEOs, top managers, and directors of corporate sector firms, etc.), have significant control over a large part of the productive resources of society in the form of public sector units (top managers of the PSUs) and have a monopoly over the use of the ideological and repressive apparatus of the State (top level bureaucrats, army officers, members of the judiciary). They seamlessly merge into the ruling class.
Relative Population Shares, Income and Wealth: Initial Estimates
What are the numerical strength of the three broad classes – the ruling class, the middle class and the working class – in Indian society today? Some very interesting recent research (Jaydev, et al., 2009; Vakulabharanam, et al., 2009) can throw some light on this important question. In their comparative study of the changing nature of inequality in India and China, Vakulabharanam, et al. (2009) use data from two rounds of the National Sample Survey (NSS) to provide a detailed picture of class structure in India. They use the National Classification of Occupation (NCO 3-digit, 1968 scheme) to divide households into various occupational categories, which can used to roughly compute relative shares of what I have defined as the ruling, middle and working classes. Using data from Table 2 in Vakulabharanam, et al. (2009), I get the rough picture presented in Table 1.
| Table 1: Class structure in India (Percentage share in population) |
|
1993-94 |
2004-05 |
| Ruling Class |
11.89 |
11.71 |
| Middle Class |
24.26 |
21.08 |
| Working Class |
63.85 |
67.21 |
Though lot more work needs to be done to get a more accurate and refined picture, Table 1, nonetheless provides a rough estimate of the relative shares of the three social classes in contemporary India. Ruling classes, in Table 1, consist of the following: owners or managers of the formal and informal sector enterprises and the rich farmers; the middle class consists of the following: professionals and skilled workers in manufacturing and services, middle peasants, rural professionals and moneylenders; the working class is composed of the rest of the population: the unskilled workers in manufacturing and services, the small and marginal peasants and the landless labourers. An interesting, though expected, fact that emerges from Table 1 is the relative squeezing of the middle class and not their growth, as the mainstream media constantly suggests. Since the size of the ruling class has remained more or less constant over the decade, it must mean that sections of the middle class is getting pushed down into the working class.
The picture presented in Table 1 is only an approximate picture; hence some caveats are in order. First, the National Sample Survey Organization (NSSO) consumption expenditure surveys, which is used by most researchers including Vakulabharanam, et al. (2009), do not give a correct picture of the members of the big bourgeoisie (the super rich in terms of wealth and income); they need to be oversampled if they are to be truly representative of their population weight in the sample. Second, some of the owners and managers that are currently part of the ruling class would actually need to be included in the middle class; this is because many of the owners would be owner-operators of small scale enterprises and some of the managers would occupy lower levels in the firms’ hierarchy; but this adjustment could not be carried out because of lack of more disaggregated data at the moment. That is why the sample share of the ruling class in Table 1 seems to be an overestimate of their true population share. Both these facts, moreover, suggest that the figure for the ruling class in Table 1 needs some serious modification. Third, some of the skilled workers that are currently part of the middle class in Table 1 should be actually included in th working class; again, this could not be done because of lack of more disaggregated data. This is the reason why, just like in the case of the ruling class, the sample share of the middle class in Table 1 is an overestimate.
A more disaggregated analysis to arrive at a more accurate picture will be conducted in the future. My conjecture is that the disaggregated analysis will throw up a picture which will correspond closely to the distribution of households according to consumption expenditure that was reported in Table 1.2, NCEUS (2007): the ruling class would be roughly 4 percent of the population and their average consumption expenditure would be greater than 4 times the official poverty line, the middle class would be roughly the next 19 percent of the population with an average consumption expenditure between 2 and 4 times the poverty line, and the rest, about 77 percent, would be what I have called the working class and which corresponds to what the NCEUS called the poor and vulnerable section which, in 2004-05, spent less than Rs. 20 per day on consumption (Table 1.2, NCEUS, 2007).
Of course, the consumption expenditure distribution that is deduced from the NSSO surveys do not provide an accurate idea about the true income and wealth of the big bourgeoisie and the top professionals in India. There are two sources that provide a much more accurate picture of the income and wealth of this class: income tax data that has been used to estimate top Indian incomes from 1922 to 2000 (Banerjee and Piketty, 2005) and the World Wealth Report and the Forbes list of the richest persons in the world (which now, quite understandably, has a separate list for India).
To get an idea of the wealth of the big bourgeoisie, note that in 2009, India had 52 billionaires, which was close to twice the number in 2007; the wealthiest them of all, Mukesh Ambani, has a net worth of $ 32 billion (Times of India, Nov., 19, 2009). 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 (Livemint, Nov., 20, 2009). To make the comparison fair 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.
Moving on to incomes of the richest Indian, Banerjee and Piketty (2005) present some very interesting facts. First, the top 1 per cent of the population accounted for about 12-13 per cent of total income in the 1950s; the share fell to 4-5 per cent in the early 1980s, and then picked up again to reach 9-10 per cent in the late 1990s; whatever the problems of the Nehruvian policy frameowrk, it did manage to redistribute income away from the rich. This U-shaped pattern, which is very similar to patterns observed in the USA too, can be an entry point into understanding the sharp policy change from the mid-1980s onwards in India: the big bourgeoisie pushed for the change in policy direction to reverse the trend of income distribution. While the top 1 per cent have more or less gained back their pre-Nehruvian era share, there are interesting patterns if we look more closely at the various sections within the rich: there has been a rapid divergence in the income shares accruing to what can be termed the super rich (the top 0.01 per cent), the moderately rich (the top 0.1 per cent) and the rich (the top 1 per cent).
Conclusion
Mao’s analysis of the class structure of Chinese society in the 1920s was extremely influential in the Chinese communist movement and facilitated the formulation of the strategy and tactics of the Chinese revolution. Given the widespread use of Mao’s basic framework of class analysis in Third World settings, it would be useful to contrast the results of the analysis presented in this paper with Mao’s characterization of classes in pre-revolutionary China (Mao, 1926).
For Mao, the ruling class in pre-revolutionary China consisted of “the warlords, the bureaucrats, the comprador class, the big landlord class and the reactionary section of the intelligentsia attached to them.” In contemporary India, the ruling class consists of the big bourgeoisie, the rich farmers and the top sections of the professionals and bureaucrats; the crucial difference, to our mind, is the absence in contemporary India of what Mao called the comprador class (the class of merchants who acted as agents of foreign capital) and the big feudal landlords. The big bourgeoisie in India today seems to be less under the influence of foreign capital than their counterparts in pre-revolutionary China; similarly, the big feudal or semi-feudal landlords that held sway over the economy of rural China seem to have been largely replaced by the rich farmers as the key ruling class element in rural areas of contemporary India.
Mao’s analysis had identified a tiny proletariat in China, which, according to him, would be the leading force in the revolution. In contemporary India, in sharp contrast to China, the proletariat is significantly larger, not only in absolute terms but also in relative terms, i.e., relative to the other social classes. This is the direct result of the wider and deeper industrial development following political independence in India compared to pre-revolutionary China. The proletariat consists, in contemporary India, of the vast majority of workers in the unorganized industrial and service sectors, part of the lower level workers in the organized sector and the effectively landless laborer families in the agricultural sector, and thus partially includes what Mao had called the semi-proletariat.
In Mao’s analysis, the petty bourgeoisie was accorded “very close attention” both because of its size and because of its class character. He had concluded that this large and important group would be an ally of the revolutionary proletariat. In contemporary India too, the petty bourgeoisie – composed of the middle peasant and the owner-operators of small enterprises and small traders and merchants – is numerically very large and because of its objective economic position will play an important role in radical social change.
What Mao did not stress and what seems to have become important in contemporary India is the place occupied by the second segment of what I have called the middle class: the professionals. With the growing complexity of social organization and social production, this group will become even more important, not only in the present social order but also in any radically different society that might arise in the future. In both the Russian and the Chinese revolutions, the post-revolutionary regime had to rely very heavily on this class to ensure functioning of the economy. According more attention to this segment of the middle class, therefore, seems warranted.
REFERENCES
Banerjee, A. and T. Piketty. 2005. “Top Indian Incomes, 1922-2000,” The World Bank Economic Review, 19(1), pp. 1-20.
Bardhan, P. 1998. The Political Economy of Development in India (expanded edition with an epilogue on the Political Economy of Reforms in India). Oxford University Press: Delhi.
Basole, A. and D. Basu. 2009. “Relations of Production and Modes of Surplus Extraction in India: An Aggregate Study.” Working Paper, Department of Economics, University of Massachusetts, Amherst. Available at: http://www.umass.edu/economics/publications/2009-12.pdf and http://sanhati.com/non-excerpted/1506/
Chibber, V. 2006. Locked in Place: State-Building and Late Industrialization in India. Princeton University Press: Princeton, NJ.
ET 500: http://economictimes.indiatimes.com/Features/ET-500-companies/articleshow/3603974.cms
Jaydev, A., Motiram, S. and V. Vakulabhranam. 2009. “Patterns of Wealth Disparities in India during the Era of Liberalization,” in A Great Transformation? Understanding India’s Political Economy (forthcoming).
Lenin, V. I. 1919. “A Great Beginning: Heroism of the Workers in the Rear.” Collected Works, Volume 29, pp. 409-434. 4th English edition, Progress Publishers, Moscow, 1972. Available at: http://www.marxists.org/archive/lenin/works/1919/jun/28.htm
Marx, K. 1992. Capital: A Critique of Political Economy, Volume 1. Penguin Classics. (first published in 1887).
National Commission for Enterprise in the Unorganized Sector (NCEUS), 2007. “Report on the Conditions of Work and Promotion of Livelihoods in the Unorganized Sector.” Government of India.
Tse-tung, Mao. 1926. “Analysis of the Classes in Chinese Society.” available online at:http://www.marxists.org/reference/archive/mao/selected-works/volume-1/mswv1_1.htm
Pedersen, J. D. 2008. “The Second Wave of Indian Investments Abroad,” Journal of Contemporary Asia, 38(4), pp. 613-637.
Vakulabhranam, V., Zhong, W. and X. Jinjun. 2009. “Patterns of Wealth Disparities in India during the Era of Liberalization,” Working Paper, Graduate Economics Research Center, Nagoya University.
World Wealth Report, 2009. Available at: www.ml.com/media/113831.pdf
Wright, E. O. 1997. Class Counts: Comparative Studies in Class Analysis. Cambridge University Press: Cambridge, UK.
Deepankar Basu is Assistant Professor at the Department of Economics, University of Massachusetts.
Posted by Deepankar Basu November 8, 2009 at 1:05 pm in Economic Notes, Economy, USA
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
Posted by Deepankar Basu November 4, 2009 at 12:00 pm in Economic Notes, Economy, USA
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?
Posted by Deepankar Basu September 22, 2009 at 8:48 am in Economic Notes, Economy, Marxism
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.)
Posted by Deepankar Basu May 25, 2009 at 10:30 pm in India, Politics, West Bengal
Deepankar Basu
Sanhati
In the recently concluded 2009 general elections to the lower house of the parliament, the Social Democratic Left (SDL henceforth) In India, composed of the Communist Party of India-Marxist (CPM), the Communist Party of India (CPI), and a bunch of smaller left-wing parties, has witnessed the severest electoral drubbing in a long time. This year, the CPM won a total of 16 parliamentary seats; compared to its performance in the last general elections in 2004, this is a whopping decline of 27 seats. The CPI, on the other hand, won 4 seats in 2009, suffering a net decline of 6 parliamentary seats from its position in 2004. Does this mean that the Indian population has rejected even the mildly progressive and social democratic policies that the SDL tried to argue for at the Central level? Is this a mandate for the Congress party and by extension a mandate for neoliberalism? I think not. This is a mandate against the SDL but not against social democratic policies; this is a mandate against neoliberalism and for welfare-oriented policies. To the extent that the Congress was pushed by the SDL to partially implement such pro-people policies, it can possibly be interpreted as an indirect endorsement of Congress’s late-in-the-day populism. After making a few comments on the national mandate, in this article, I focus my attention on West Bengal, the bastion of the SDL in India.
Mandate versus Outcome
Let us begin by distinguishing between the mandate and the electoral outcomes. The change in the number of seats won and lost (the electoral outcome) is only a partial, and imperfect, reflection of the change in the actual level of support parties enjoy among the people (the mandate); often the particular logic of electoral arithmetic draws a wedge between the mandate of the people and the electoral outcome in terms of seats won or lost. For instance, it is possible for a party to increase its share of votes polled without this increase leading to any increase in the number of seats won; conversely, it is possible for a party to decrease its share of votes polled without losing in terms of seats. An example of the former is BSP’s performance at the national level in 2009: it has emerged as the third largest national party, increasing its share of votes polled from 5.33 percent in 2004 to 6.17 percent in 2009, but this has not translated into any appreciable increase in terms of seats. An example of the latter is CPM’s performance in Tripura: its share of the votes polled dropped from 68.8 percent in 2004 to 61.69 percent in 2009, but that did not affect its position in terms of seats. Hence, to understand the structure of the "popular will," it is necessary to go beyond the position in terms of seats won and lost; one needs to study the changes in the shares of votes polled.
Focusing on the share of votes polled is also enough, among other things, to dispel certain misinterpretations of the mandate of the 2009 general elections that seem to have wide currency. The first misinterpretation that is gaining ground is the alleged existence of a "wave" in favor of the Congress party which swept it to power overcoming the ubiquitous current of anti-incumbency. Nothing could be farther from the truth. Despite having won 206 parliamentary seats, the Congress merely won 28.55 percent of the votes polled in 2009; this is a little less than a 2 percentage point increase from 2004. 29 percent can hardly be interpreted as a "massive wave"; besides, this overall increase also hides substantial decreases in several important states such as Orissa, Jharkhand, Chhattisgarh, and Andhra Pradesh. The second misinterpretation that is doing the rounds is that this general election saw the definite demise of regional parties and all federalist tendencies of the Indian populace; the people voted overwhelmingly for national parties, the argument goes, because they want stability. Whether people desire stability is a questions that cannot be entered into at the moment, but the fact that the populace did not reject regional parties in favor of national parties can be seen by looking at the share of votes going to the Congress and the BJP together: according to provisional figures released by the Election Commission of India, the combined vote share of the Congress and BJP in fact declined from 48.69 percent in 2004 to 47.35 percent in 2009. Thus, the share of votes going to the two main national parties has declined; so much for the ascendancy — what historian Ramachandra Guha called the "course correction" — of the tendency for centralization in the Indian polity.
Social Democratic Performance: National Level
How did the social democratic parties perform in terms of the share of votes polled? At the national level, the CPM lost only marginally in terms of its share of votes polled, which declined from 5.66 percent in 2004 to 5.33 percent this year; the CPI, on the other hand, gained marginally at the national level, increasing its share of votes from 1.41 to 1.43 percent. Thus, going by these national figures, there is no evidence of any nationwide "wave" against the social democrats’ opposition, however feeble, to the neoliberal policies of the Central government. Those who want to interpret the current debacle of the social democrats as a national mandate against progressive economic and social policies need to rethink their arguments; the evidence does not support such an argument. In fact, as I will argue below, if there can be discerned any "wave" in favor of the Congress in the mandate, it is largely a "wave" against neoliberal economic policies and not the other way round as many pro-establishment analysts are making it out to be.
But the national level figures hide many interesting state-level variations, so we must look at state-level data. There is another reason why we need to supplement national level with state-level analysis: since the SDL is prominent only in the three states of Kerala, Tripura, and West Bengal, the national figures are not very relevant to assessing the electoral prospects of the social democrats. Hence, we must look at state-level data for Kerala, Tripura, and West Bengal to understand the sharp change in the electoral performance of the social democratic Left in India and draw conclusions about its continued relevance in the Indian polity.
Social Democratic Performance: State Level
How did the social democrats perform in the different states? First, the SDL managed to increase its vote share in a few states: Andhra Pradesh, Goa, Gujarat, Madhya Pradesh, Manipur, Rajasthan, Uttar Pradesh, Chhattisgarh, Uttaranchal, and Andaman & Nicobar Islands. Apart from Manipur, of course, the total vote share of the SDL in these states remains insignificant; hence, the increase in the vote share did not even remotely translate into changes in seats. Second, the SDL lost its share of votes polled in a large number of states: Assam, Bihar, Jammu & Kashmir, Kerala, Maharashtra, Punjab, Tamil Nadu, Tripura, West Bengal, and Jharkhand. The percentage declines in Punjab and Jharkhand were very large, though that did not affect the reckoning in terms of seats because the SDL did not have seats to start with, i.e., in 2004. Third, the states where the loss of vote share wreaked havoc for the SDL’s reckoning in terms of seats were Kerala and West Bengal: in Kerala, the share of votes going to the SDL declined from 39.41 percent in 2004 to 37.92 percent in 2009; in West Bengal, the share of votes garnered by the SDL declined from 50.72 percent in 2004 to 43.3 percent in 2009.
Let me summarize the evidence presented so far: the SDL’s marginal decrease in vote share at the national level was made possible by the offsetting of the decrease in vote share in several states by the increase in others. The fact that this marginal decrease led to such a debacle in terms of seats is driven by the fact that the bulk of the decrease in vote share was concentrated in the electorally important states of Kerala and West Bengal whereas the increase in vote share was spread out electorally across states where the SDL is marginal. Thus the state-level distribution of the increase and decrease of vote shares for the SDL turns out to have profound implications in terms of electoral outcomes at the national level.
Social Democrats Help the Congress
This, of course, brings us to this important question: why was the bulk of the decrease in vote share for the SDL concentrated in Kerala and West Bengal? The clue to an answer is provided by the fact that both states, Kerala and West Bengal, currently have social democratic governments, led by the largest social democratic left party in the country, CPM. In both states, the social democratic governments have, over the past few years, increasingly accepted, adopted, and pushed neoliberal economic policies, often in the name of development and industrialization. Thus, we saw the emergence of a paradoxical situation: the SDL opposed, however feebly, the continued adoption of neoliberal polices at the level of the Central government, while the same set of policies was aggressively pursued in the states where they were in power. The debacle of the SDL in the two most electorally important states of Kerala and West Bengal can, therefore, be understood as a strong rejection of this doublespeak and hypocrisy of the SDL. The rejection of the SDL at the level of these two states, moreover, dovetails into the overall mandate in favor of progressive and social democratic policies, and against the neoliberal turn, at the national level. Of course there were other local factors, both in West Bengal and in Kerala, that overlaid this broad rejection of the neoliberal turn and turned the mandate decisively against the SDL in both these states. Before we look at some of these factors, especially for West Bengal where the debacle of the SDL was the most stunning, a comment about the so-called national "wave" in favor of the Congress is in order.
The so-called nationwide "wave" in favor of Congress, if there was one, resulted to a large extent from the slew of populist policies that it adopted, paradoxically pushed towards this by the SDL, over the last few years. These include the National Rural Employment Guarantee Act (NREGA), the step-up in public investment in agriculture, the debt relief program for farmers, the Right to Information Act 2005, the Central Educational Institutions (Reservation in Admission) Act 2006, the Unorganized Workers’ Social Security Bill 2008, and the setting up of the Sacchar Committee to inquire into the continued marginalization of Muslims in the country. The Congress cashed the benefits of this populist swing electorally claiming it to be its own policies whereas, in truth, the SDL was largely instrumental in pushing for these policies at the central level. Other such social democratic policies pushed for by the SDL include: opposition to financial sector reforms (pensions, insurance), opposition to outright privatization of the public sector, opposition to privatization of health care and education. These defensive actions by the SDL have partially limited the unbridled power of capital to exploit labor and have provided some relief to the mass of the working people in India. It is, therefore, no surprise that corporate India is exultant at the social democrats’ drubbing at the hustings in 2009. The stock market in Bombay went into a tizzy immediately after the results were out and trading had to be stopped for a while to deal with the unprecedented euphoria! As many media reports show, the Confederation of Indian Industries (CII), the Federation of Indian Chambers of Commerce and Industry (FICCI), and other business groups have already started preparing their "wish-list" of reforms, by which they mean another round of neoliberal policy assault; quite unsurprisingly, land reforms does not figure in this wish-list of "reforms."
The SDL’s ability to counter the Congress claim that the populist thrust was a result of a progressive shift in the party, in reality fiercely opposed by entrenched interests within the Congress, was severely limited by the SDL’s de facto record in the states where it was in power: Kerala and West Bengal. Thus, paradoxically, while the SDL was largely responsible for creating the populist shift in the Congress party and thereby creating a "wave" in its favor, it could not transform this effort into any substantial electoral advantage for itself; and this was largely because of its doublespeak and hypocrisy, saying one thing at the Central level and doing exactly the opposite at the State level.
Probably nothing brings out this doublespeak and hypocrisy of the SDL better than the National Rural Employment Guarantee Act (NREGA). The NREGA, which provides a guarantee of a minimum of 100 days of work to the rural poor, came into effect on February 2, 2006 in 200 of India’s poorest districts. This provision was originally brought by grassroots-level mass movements in Rajasthan and other states in India, and was later adopted and forcefully pushed by the SDL at the central level. While the NREGA has been constantly attacked in the mainstream press as a waste of resources and a useless policy initiative, it has in fact created substantial benefits for the rural proletariat and poor peasants; even though there is still a lot of room for improvement, the NREGA has managed to improve the lives of the rural poor by putting a floor on agricultural wages and assuring some days of employment, both of which resulted in increased rural incomes.
West Bengal: A Closer Look
How did the NREGA fare in West Bengal and Kerala compared to other states? In 2006-07, the person-days of NREGA employment generated per rural household was 6 in West Bengal and 3 in Kerala, with both states figuring in the list of the 3 worst performers. Compared to this, the all-India average was 17 person-days, and Chhattisgarh generated 34, Madhya Pradesh 56, Assam 70, and Rajasthan 77 person-days. A similar picture emerges for the next year, too: in 2007-08, West Bengal generated 8 person-days and Kerala 6 person-days, much below the all-India average of 16 person-days. The dismal performance of the state government led the Paschim Banga Khet Majoor Samity (PBKMS), a non-party, registered trade union of agricultural workers, to file a public interest litigation in the Calcutta High Court on non-implementation of the 100-days work guarantee scheme in West Bengal.
Coming back to the factors specific to West Bengal that led to this stunning electoral defeat of the SDL, we must complement the story of the state government’s surrender to neoliberalism with its misguided arrogance. The utter failure in the implementation of the NREGA went hand in hand with other overt neoliberal policy moves: privatization of health care, privatization of education, the full-scale assault on the public distribution system, and an aggressive State-sponsored attack on farmers to "acquire" their agricultural land for a neoliberal industrialization drive. Singur and Nandigram stand as symbols, at the same time, of both this attack by the State on behalf of corporate capital and also of the fierce resistance to this brutality by the poor peasants and landless laborers. The arrogance of the SDL-led state government was on gruesome display during the "re-capture" of Nandigram in March 2007, a violent attack on the people opposing forcible land acquisition, and also in the manner it dealt with the case of Rizwanur Rahman. Coming as it does in the background of the dismal conditions of the Muslims in the state, the total insensitivity displayed in the Rizwanur Rahman case increased the ire of the common Muslim population against the SDL-led state government. Taken together, all these factors created a massive wave of anger and resentment against the state government and resulted in the unprecedented electoral debacle of the SDL in West Bengal.
A Spurious Argument
At this point, we need to closely scrutinize an alternative argument that is doing the social democratic rounds. This argument, which purports to provide an explanation of the electoral defeat of the SDL in West Bengal, runs something like this: the Left Front made a great tactical mistake in severing ties with the Congress-led United Progressive Alliance (UPA) at the Center on the issue of the 123 treaty (nuclear deal) with the USA; this severing of ties with the Congress allowed the Trinamool Congress (TMC) and the Congress (INC) to forge an alliance in West Bengal; this alliance managed to consolidate the anti-Left votes and directly resulted in the electoral drubbing of the SDL in West Bengal.
This argument, if true, would provide some solace to the SDL leadership in India. By shifting the responsibility of the electoral debacle onto the logic of alliance arithmetic, the SDL would manage to skirt some difficult issues of policy and politics. But, alas, the argument does not hold water when confronted with evidence. There is a simple way to determine the validity or otherwise of this, to my mind, spurious argument. If it were true that the SDL debacle was fueled mainly by the consolidation of anti-Left votes (because of the Congress-TMC alliance), it would mean the following: the SDL’s share of votes polled would remain relatively unchanged between 2004 and 2009. This is a straightforward testable implication of the above argument. What does the evidence say on this?
In Table 1 we have summarized data about the change in the vote share of the Left Front (CPM, CPI, AIFB, and RSP) at the level of the parliamentary constituencies between the general elections in 2004 and 2009; a negative number implies an increase in the vote share from 2004 to 2009, and a positive number implies a decline. As can be seen from Table 1, out of the 42 parliamentary constituencies in West Bengal, the SDL’s vote share went down in 39, ranging from 0.49 percent in Balurghat to a whopping 34.8 percent in Hooghly! The only 3 constituency where the SDL managed to increase their vote share is: Malda North, Murshidabad, and Ghatal; in all the other constituencies its vote share fell between 2004 and 2009. There were 25 constituencies where the share of votes garnered by the SDL fell by more than 5 percentage points, there were 11 constituencies where the vote share fell by more than 10 percentage points, and there were 5 constituencies where the vote share declined by more than 15 percentage points. Can we, in the face of this overwhelming evidence of a massive anti-SDL wave, still stick to the story of the supposed consolidation of anti-Left votes as the primary reason behind the SDL debacle?
Table 1: Constituency-Wise Decrease in Vote Share of the Left Front from General Election 2004 to 2009
| Constituency |
Change |
Constituency |
Change |
| Malda North |
-5.71 |
Kanthi |
7.67 |
| Murshidabad |
-1.09 |
Malda South |
7.68 |
| Ghatal |
-0.66 |
Arambagh |
7.74 |
| Balurghat |
0.49 |
Darjeeling |
7.99 |
| Uluberia |
1.58 |
Mathurapur |
8.06 |
| Medinipur |
1.70 |
Bishnupur |
8.28 |
| Jalpaiguri |
2.11 |
Tamluk |
8.50 |
| Asansol |
2.51 |
Bongaon |
8.89 |
| Kolkata South |
2.80 |
Basirhat |
9.05 |
| Diamaond Harbor |
2.98 |
Birbhum |
9.65 |
| Raigunj |
3.13 |
Krishnanagar |
12.53 |
| Dum Dum |
3.62 |
Barasat |
12.54 |
| Bardhaman Purba |
3.69 |
Joynagar |
12.91 |
| Jangipur |
3.80 |
Barrackpur |
12.97 |
| Ranaghat |
3.88 |
Kolkata North |
13.64 |
| Bahrampur |
3.99 |
Sreerampur |
13.72 |
| Alipurduars |
4.48 |
Bolpur |
15.65 |
| Jadavpur |
5.35 |
Purulia |
15.94 |
| Howrah |
5.61 |
Bankura |
16.62 |
| Cooch Behar |
6.88 |
Bardhaman-Durgapur |
16.99 |
| Jhargram |
7.12 |
Hooghly |
34.80 |
Beyond Elections
There is no denying the fact that the SDL played an important role in halting the juggernaut of neoliberalism in India through its intervention in the formation of the Common Minimum Programme of the UPA; and this was largely possible, given the political situation five years ago, because of the sizeable parliamentary presence of the SDL at the Central level. If nothing else, the reaction of corporate India to the electoral debacle of the SDL is proof of the partial efficacy of the SDL’s past interventions. But there are, I would submit, at least two serious problems of a strategy that focuses primarily on electoral politics as the SDL does.
First, most of its interventions, even though salutary, are at best defensive actions. The ruling classes set the agenda and move forward with a concrete program of neoliberal reforms and the SDL reacts to that agenda: it tries to halt the speed of the reforms, tries to win a battle here or there, without in any real sense questioning the logic of the whole move. The logic of the whole move can only be questioned when there is a positive agenda guiding political intervention. In the absence of such a positive political program, it boils down to the following: the ruling class ushers in the policy triumvirate of liberalization, privatization, and globalization, and the SDL merely reacts to these. In such a scenario, the best outcome can only be a return to the status quo, not a move forward towards a socialist future.
This brings me to the second, and related, problem of the SDL strategy. The fact that the Communist parties, now part of what I have called the SDL, have lost the political offensive in the context of the class struggle in India also finds reflection in their over-emphasis on electoral politics, to the virtual exclusion of all non-electoral struggles. Over the last two decades, there is not one significant non-electoral struggle that the SDL initiated or led; all its attention and energy has been fixed towards how to maintain its electoral position. More often than not, the SDL has been willing to enter into opportunistic and unprincipled alliances to attain short-term electoral goals, little realizing that this opportunism leads to long-term political setbacks. At times it has even gone with the BJP to keep Congress out of power, quickly reversing the logic at the next moment and aligning with the Congress to defend secularism. Caught in these endless electoral antics and working within a framework whose rules have been set by the ruling classes, the SDL has gradually distanced itself from its programmatic concerns of a people’s democratic revolution. To recover its potency and relevance, the SDL must refashion itself by forging links with the rising tide of mass movements in India against the neoliberal offensive and overcome its obsession with electoral politics. If post-poll statements of the SDL bigwigs are anything to go by, however, they have decided to do exactly the opposite: blame the electoral debacle on external factors, avoid any serious rethinking, and continue with elections as the primary focus of SDL politics.
- – - – - – - – - – - – - – - – - – - –
Correction
While computing the numbers for Table 1, I had not fully taken account of the delimitation of parliamentary constituencies that took place in 2008. Hence, some of the numbers in Table 1 are inaccurate because the parliamentary constituencies themselves have changed. Thus, while it is difficult to accurately see how the 7 percent statewide decline in vote share of the Left Front is distributed across all the parliamentary constituencies (which is what Table 1 inaccurately reported) because of the 2008 delimitation of constituencies, we can nonetheless figure out the changes in vote shares in those that remained relatively unchanged by the delimitation process: Balurghat saw a marginal decline of 0.49 percent, Raigunj a decline of 3.13 percent, Alipurduars a decline of 4.48 percent, Cooch Behar a decline of 6.88 percent, Darjeeling a decline of 7.99 percent, Birbhum a decline of 9.65 percent and Bolpur witnessed a massive decline of 15.65 percent. But the statewide decline in the vote share of the Left Front remains unchanged and thus my main argument remains unaffected; only the distribution of the change in vote share across parliamentary constituencies has changed. Once the Election Commission of India comes out with data at the assembly segment level, one can recompute the numbers that make Table 1 to get a more accurate picture; the trend of declining vote share for the Left Front, though, will remain unchanged.
Posted by Deepankar Basu May 17, 2009 at 12:16 pm in Economic Notes, Economy, India, Marxism
Amit Basole and Deepankar Basu
Sanhati
PDF Version of the Article
Abstract: This paper uses aggregate-level data as well as case-studies to trace the evolution of some key structural features of the Indian economy, relating both to the agricultural and the informal industrial sector. These aggregate trends are used to infer: (a) the dominant relations of production under which the vast majority of the Indian working people labour, and (b) the predominant ways in which the surplus labour of the direct producers is appropriated by the dominant classes. This summary account is meant to inform and link up with on-going attempts at radically restructuring Indian society.
Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past.
The Eighteenth Brumaire of Louis Bonaparte, Karl Marx.
INTRODUCTION
Assessing the nature and direction of economic development in India is an important theoretical and practical task with profound political and social implications. After all, any serious attempt at a radical restructuring of Indian society, if it is not to fall prey to empty utopianism, will need to base its long-term strategy on the historical trends in the evolution of the material conditions of life of the vast majority of the population. Attempting to contribute to past debates and as part of on-going attempts at radical transformation of Indian society, this paper tries to provide a summary account of the evolution of some key structural features of the Indian economy over the last few decades.
The principal questions that motivate this study are: what types of production relations does the vast majority of the working population in Indian agriculture and industry labor in? How is economic surplus appropriated from the producers? The aim is not merely to arrive at a label such as “capitalist,” “semi-feudal” etc; nor to enter into a debate over whether the transition to capitalism is occurring as expected or not. Rather we are motivated by a desire to understand the material conditions under which the working population labors and the manner in which it is exploited.
The analysis is largely pitched at the aggregate level, complemented, wherever possible, with micro-level studies and data. While a study of the structural evolution of the Indian economy is of interest in itself, this paper uses trends in the structural evolution of the Indian economy to make inferences about the mode of generation, appropriation and use of the surplus product in Indian society.1 The focus on surplus appropriation, in turn, is motivated by the Marxist idea that the form of extraction of unpaid surplus labour provides the key to understanding the structure and evolution of any class-divided society. This important insight was most clearly articulated by Marx in Volume III of Capital:
The specific economic form in which unpaid surplus labour is pumped out of the direct producers determines the relationship of domination and servitude, as this grows directly out of production itself and reacts back on it in turn as a determinant. On this is based the entire configuration of the economic community arising from the actual relations of production, and hence also its specific political form. It is in each case the direct relationship of the owners of the conditions of production to the immediate producers – a relationship whose particular form naturally corresponds always to a certain level of development of the type and manner of labour, and hence to its social productive power – in which we find the innermost secret, the hidden basis of the entire social edifice, and hence also the political form of the relationship of sovereignty and dependence, in short the specific form of the state in each case.(page 927, Marx, 1993; emphasis added.)
The emphasis on the form in which surplus labour is extracted from the direct producers is important and worth dwelling on a little. Every class divided society rests on the appropriation of unpaid surplus labour of the direct producers; the fact that one group of people can, due to their location in the process of production, appropriate the surplus labour of another group is what defines a class. The appropriation of the surplus labour of direct producers by the ruling class is as much true of a feudal organization of production as it is of a capitalist mode of production. What distinguishes the two is the form in which this surplus labour is appropriated by the ruling classes, not the fact of surplus extraction per se. It is only in the capitalist mode of production that the surplus labour of the direct producers, i.e., the workers, takes the form of surplus value and is mediated through the institution of wage-labour. While this makes the exploitation of workers less apparent under capitalism, it also distinguishes the capitalist mode of production from non-capitalist modes, where the appropriation of surplus labour is much more visible, direct and brutal. For instance, in the feudal organization of society in Medieval Europe, the surplus labour of the serf was immediately visible as the work he did on the lord’s land; the surplus labour took the form of the product of the serf’s labour. The visibility of exploitation, understood as the appropriation of unpaid labour time of the direct producers, is lost under capitalist relations of production; it is obscured by the institution of wage-labour.
The study attempts to identify the evolution of the modes of appropriation of surplus labour in India indirectly by studying the evolution of key structures of the Indian economy at the aggregate level. The underlying assumption of the whole study is that the evolution of the aggregate economic structures, like ownership patterns in the agrarian economy, the evolution of labour forms like tenancy, wage-labour, bonded labour, the size-distribution of firms in the informal sector, the patterns of employment and migration, the importance of merchant and finance capital, etc., can provide useful and reliable information about the mode of surplus extraction. While it is possible to form a picture of the aggregate evolution of the Indian economy using data available from sources like the NSSO, the Agricultural Census, the Census of India – and that is precisely what we do in this study – we are fully aware of the limitations of such aggregate accounts. Many micro-level variations are lost in the aggregate story and so, wherever possible, the aggregate picture is complemented with case studies.
The study is broadly divided into two sections, one dealing with the agrarian economy and the other with what has come to be called the “informal” industrial sector. This twin focus is motivated by several considerations. First, the agrarian economy accounts for the largest section of the country’s workforce and population; this makes it a natural focus of any study which attempts to understand the evolution of the Indian economy and society at the aggregate level. Second, while the non-agrarian economy consists of the industrial and the services sector, the majority of the workforce in these two sectors is, again, found in what has been called the “informal” sector; that is why this becomes one of the foci of this study. Third, to the extent that an understanding of the relations of production (and forms of surplus extraction) is at issue, the “formal” industrial and services sector are probably beyond the domain of any debate; most serious scholars and activists would agree that the “formal” sector is characterized by capitalist relations of production. Since, what seems to be at issue is the “correct” characterization of the relations of production and forms of surplus extraction in the agrarian economy and the non-agricultural “informal” sector, this study focuses on precisely these two as an intervention in the broader debate about the characterization of Indian society.
Here we present a summary account of our findings, first for the agricultural sector and then for the “informal” industrial sector and end by raising some political and philosophical issues for discussion; for more empirical details and sources of the data readers are requested to look at the full article (which is posted here as a pdf).
AGRICULTURE: TRENDS AND SUMMARY
Our analysis of aggregate level data has revealed the following significant trends in the agrarian economy of India:
1.The share of GDP contributed by agriculture has steadily declined over the last five decades; this decline has not been matched by a decline in the share of the workforce engaged in agriculture. The result of these two trends has been a declining share of per capita value added from the agricultural sector. This has essentially consigned a large section of the Indian working population to very low productivity (and low income) work.
2.The average size of agricultural holdings, both ownership and operational, has seen a steady decline over the last five decades, with the average ownership holding in 2002-03 being 0.73 hectares.
3.The ownership of land remains as skewed as it was five decades ago; several measures capture this skewed pattern of ownership in the agrarian economy. For instance, the Gini coefficient of landholding ownership concentration has remained practically unchanged between 1960-61 and 2002-03. In fact it has marginally increased between 1991-92 and 2002-03.
4. While the aggregate distribution of land ownership remains as skewed as before, interesting and important patterns are visible within this unchanging aggregate picture. The share of land owned by large (10 ha or more) and medium (4 ha to 10 ha) landholding families has steadily declined over the last few decades from around 60% to 34%; the share owned by small (1 ha to 2 ha) and marginal (less than 1 ha) landholding families has increased from around 21% to 43%, while the share of semi-medium (2 ha to 4 ha) families has remained unchanged at around 20%.
5.Parallel to this decline in the share of land held by large landholding families is their decline as a share of rural households; on the other hand, there is a large increase in the share of small and marginal landholding families among rural households. In 2002-03, 80% of rural households were marginal landholding families; the corresponding figure was 66% in 1960-61. Both these trends seem to indicate the declining economic, social and political power of the landowning class in India.
6.The geographical (inter-state) variation of landholding ownership pattern allows us to divide the Indian states into two groups: large landholding states, and small landholding states. In the “large” landholding states, a substantial share of total area is still owned by relatively large landholding families; in the “small” landholding states, the share of land held by large or medium landholding families is very small. The former group consists of: Andhra Pradesh, Gujarat, Haryana, Karnataka, Madhya Pradesh, Maharashtra, Punjab, Rajasthan; the second group consists of: Assam, Bihar, Himachal Pradesh, J&K, Kerala, Orissa, Tamil Nadu, Uttar Pradesh, West Bengal.
7.Going hand-in-hand with the decline in the share of land owned by large landowning families, is the steady decline of tenant cultivation and its gradual replacement by self cultivation in Indian agriculture. The share of operational holdings using tenant cultivation declined from about 24% in 1960-61 to about 10% in 2002-03. There are large geographical variations in the extent of tenancy, with the largest share of leased-in land as a share of total operated area occurring in Punjab and Haryana, two prominent examples of what we have called large landholding states; Orissa has high prevalence of tenancy and is an example of what we have called small landholding states. The proportion of area owned and the proportion of area operated by the different size-classes are almost equal; hence, there is no evidence of reverse tenancy on any substantial scale at the aggregate level, though this might hide reverse tenancy at state or regional level.
8.In most places where tenancy exists, the largest form of the tenancy contract is still sharecropping. In 2002-03, share cropping accounted for about 40% of the land under tenancy; this has more or less stayed constant over the decades. An important exception is Punjab and Haryana, the two states which have the largest share of leased-in land, where the predominant form of the tenancy contract is for fixed monetary payment.
9.Effective landlessness is large and has steadily increased over the past few decades. The share of effectively landless households in total rural households has increased from about 44% in 1960-61 to 60% in 2002-03.
10.Small holding agricultural production has increasingly become economically unviable over the years. In 2003, the average income from cultivation was insufficient to cover even the very low level of consumption expenditures of the majority of rural households. This is one of the primary causes behind the recent increase in rural indebtedness. This increasing difficulty of sustaining incomes through cultivation was probably what led close to 40% of farmers in 2005 to suggest, in the course of a NSSO Survey, that given a chance, they would opt out of agriculture. Changes in the agrarian structure of India seem to have already brought the question of collectivization on the historical agenda. We return to this point in the conclusion.
11. Disaggregating total incomes of rural households engaged in agriculture show that wage income has become the main source of income for a large majority of the population. For about 60% of the rural households in 2003, the major share of income came from wage work, supplemented by income coming from petty commodity production, both in the agricultural and non-agricultural sector. Another 20% of rural households drew equal shares of their total income from wage work and cultivation, both at about 40%.
12.Prevalence of informal sources of credit through moneylenders had seen a sharp decline over the 1960s and 1970s, but the decline seems to have been halted since the early 1980s. The moneylender has made a comeback in rural India, facilitated by a steady retreat of the institutions of formal credit.
13.There was significant capital accumulation in the agricultural sector during the 1970s and 1980s; this has drastically fallen during the 1980s and has picked up a little during the 1990s. The fall in the growth rate of capital formation has been largely driven by the fall in public sector investments in the agrarian economy.
Putting all these trends together, one is led to the following tentative conclusions (more in the nature of a working hypothesis): over the past few decades, the relations of production in the Indian agrarian economy have slowly evolved from what could be characterized as “semi-feudal” towards what can tentatively be termed “capitalist”; this conclusion emerges from the fact that the predominant mode of surplus extraction seems to be working through the institution of wage-labour, the defining feature of capitalism. Articulated to the global capitalist-imperialist system, the development of capitalism in the periphery has of course not led to the growth of income and living standards of the vast majority of the population. On the contrary, the agrarian economy has continued to stagnate and the majority of the rural population has been consigned to a life of poverty and misery.
Aggregate level data suggests that the two main forms through which the surplus product of direct producers is extracted are (a) surplus value through the institution of wage-labour (which rests on equal exchange), and (b) surplus value through unequal exchange (which mainly affects petty producers) where input prices are inflated and output prices deflated for the direct producers due to the presence of monopoly, monopsony and interlinking of markets; semi-feudal forms of surplus product extraction, through the institution of tenant cultivation and share cropping, has declined over time. Merchant and usurious capital continues to maintain a substantial presence in the life of the rural populace, both of which manage to appropriate a part of the surplus value created through wage-labour, apart from directly extracting surplus value from petty producers through unequal exchange.
The process of class differentiation has been considerably slowed down and complicated due to the steady incorporation of the Indian economy into the global capitalist system, which has supported and even encouraged the growth of a large “informal” production sector. This informal production sector can be best understood as being involved in petty commodity production, both of agricultural and nonagricultural commodities. Petty commodity production refers to the organization of production where the producer owns the means of production and primarily uses family and other forms of non-wage labour in the production process. Petty commodity production is exploited mainly by merchant and usurious capital where the main form of surplus extraction is through the mechanism of unequal exchange and not through the institution of wage-labour; unequal exchange is often facilitated and maintained through interlinked product, labour and credit markets. The coexistence of both wage-labour and petty commodity production, whereby landless labourers, marginal farmers and small farmers participate in both, in one as free labour and in the other as owner-producer, has impeded the development of proletarian class consciousness and complicated the task of revolutionary politics. It is to a detailed study of petty commodity production in the non-agricultural sector that we now turn.
INFORMAL INDUSTRY: TRENDS AND SUMMARY
In the second part of this study we have attempted to take a broad look at the organization of informal industry in India. In particular we have focused on the evolution of firm size, the types of production relations and the modes of surplus extraction prevailing in informal industry. The following conclusions can be drawn:
1. The industrial sector as a whole (formal and informal) has not expanded greatly in terms of employment in the past three decades and today stands at around 18% (compared to China’s 24%) of total employment in the Indian economy.
2. The informal sector still accounts for around 75% of industrial employment in India. The employment share of the formal sector in general and large-scale industry in particular has been stagnant for the past three decades.
3. Informal industry produces a wide variety of commodities including food products, textiles, wood and metal products and provides services to several types of heavier and more capital-intensive industry.
4. The number of informal firms and workers has been more of less stationary since the 1980s and the relative share of petty-proprietorships, marginal and small capitalist firms is also largely unaltered.
5. As expected most informal firms do not own substantial amounts of capital equipment. The land or building on which the firm is situated accounts for 60-80% of asset value for informal firms.
6. Even though GVA for the formal sector far outstrips GVA in the informal sector, value added in informal industry has increased significantly in the last decade. Since the number of workers has remained more or less the same, this suggests that labor productivity has been rising in this sector.
7. The relations of production in informal industry are neither purely independent producer (characterized by producer’s ownership of labor and capital) nor only industrial capitalist (characterized by a proletarian workforce and a real subsumption of labor to capital). Rather a spectrum of putting-out relations based on formal subsumption of labor and a reliance on extraction of absolute rather than relative surplus value is observed.
8. In addition to putting-out arrangements, nominally self-employed or independent producers are often locked into a relation of dependency vis-à-vis merchant and finance capital. This situation is closely analogous to the position of the peasant in the countryside with respect to intermediaries.
9. Piece-wages, unequal exchange, bonded labor, contingent and casual labor, and gender and caste oppression all conspire to increase the producer’s exploitation largely via extraction of absolute surplus value.
10. In the face of the failure of modern industry to expand satisfactorily, informal industry has acted as the “employer of last resort” for surplus labor in the agricultural sector. Relations of dependency and lack of resources as well as incentives for technical change keep informal workers trapped in low productivity, low wage work. Surplus labor, low wages and intense (self) exploitation in turn create disincentives for technical change.
CONCLUSION
By way of conclusion, we would like to raise some political and philosophical issues and questions for further discussion without in any way claiming to have arrived at any conclusive answers. Though both the authors largely agree to the aggregate trends presented above, we derive different political and social implications from these trends. This derives partly from different political and philosophical perspectives that both of us see ourselves closest to. Rather than paper over our differences, we therefore, present our alternative viewpoints, which might even be contradictory, for further debate and discussion.
The first issue that we would like to put forward for discussion is the continued centrality of the agrarian question to any project for revolutionizing Indian society. This follows simply from the fact that the majority of the working people in India are related, directly or indirectly, with the agricultural sector; this is a direct result of the failure of the structural transformation of the Indian economy. Any attempt, therefore, at radical reconstruction of Indian society will have to deal with the agrarian question effectively. Dealing with the agrarian question will mean, among other things, rapidly increasing the productivity of agricultural activity, the surest way to increase the income of the vast masses of the working people involved in agriculture and thereby create a home market for domestic industry.
But here we come up with some difficult questions that need to be addressed. Traditionally, the Marxist tradition has seen redistributive land reforms as essential to the project of dealing with the agrarian question. The reasons have primarily been political, though some economic arguments have also been developed.2 Politically, land reforms have been seen as a way to decisively break the power of the parasitic class of feudal and semi-feudal landlords; economically, it has been understood as creating conditions for the development of the productive forces in rural society, increasing the productivity of labour, creating a surplus for supporting industrialization and providing a market for domestic industry.
Using Lenin’s distinction between the Prussian and the American paths for bourgeois development in the rural economy lends credence to the call for redistributive land reforms. Discussing the “two forms” of bourgeois development out of the feudal and semi-feudal order characterized by serfdom, he says:
The survivals of serfdom may fall away either as a result of the transformation of landlord economy or as a result of the abolition of the landlord latifundia, i. e., either by reform or by revolution. Bourgeois development may proceed by having big landlord economies at the head, which will gradually become more and more bourgeois and gradually substitute bourgeois for feudal methods of exploitation. It may also proceed by having small peasant economies at the head, which in a revolutionary way, will remove the “excrescence” of the feudal latifundia from the social organism and then freely develop without them along the path of capitalist economy.
Those two paths of objectively possible bourgeois development we would call the Prussian path and the American path, respectively. In the first case feudal landlord economy slowly evolves into bourgeois, Junker landlord economy, which condemns the peasants to decades of most harrowing expropriation and bondage, while at the same time a small minority of Grossbauern (“big peasants”) arises. In the second case there is no landlord economy, or else it is broken up by revolution, which confiscates and splits up the feudal estates. In that case the peasant predominates, becomes the sole agent of agriculture, and evolves into a capitalist farmer. In the first case the main content of the evolution is transformation of feudal bondage into servitude and capitalist exploitation on the land of the feudal landlords—Junkers. In the second case the main background is transformation of the patriarchal peasant into a bourgeois farmer. (Lenin, 1907).
The three main communist streams in India, the Communist Party of India (Marxist), the Communist Party of India (Marxist-Leninist) Liberation and the Communist Party of India (Maoist) more or less accept this distinction, the first two explicitly and the last one implicitly.3 Hence, for all the three streams the main task (or axis) of the current stage of the Peoples (or New) Democratic Revolution is the agrarian revolution, with redistributive land reforms being one of its main tasks.
While it is true that India, because it did not witness any serious efforts at land reforms on a national scale, developed along the landlord path out of semi-feudalism, there are some important differences that need to be considered. One pole of landlord capitalism, viz., landlessness has been growing over the years; the other pole of landlord capitalism, viz., the continued dominance of a few “big peasants” seems to be at variance with the evidence. Aggregate level data about India that we have seen in the course of this study seems to throw up an unmistakable trend of the declining power of landlords (feudal or otherwise), not by any revolutionary means but just by the sheer pressure of demographic developments and economic stagnation. The total land owned by the large landholding families, the “big peasants” that Lenin refers to, have halved over the last five decades and today they own only about 12 percent of the total land. On the other hand, the land owned by medium-to-small landholding families has increased to over 65 percent. Does this, along with other evidence on the decline of tenancy and the increase of wage-labour, not indicate that the rural economy in India is inexorably being pushed in the direction of peasant capitalism? How would this important trend of the increasing dominance of peasant capitalism, and a gradual whittling down of landlord capitalism, change the course of the agrarian revolution? If landlords, as a class, are dwindling in economic and social power, is a programme aimed at breaking their political power still relevant? Is the contradiction between feudalism and the broad masses of the people still the principal contradiction in India today?
Another issue that will need to be addressed in the context of the slogan for redistributive land reforms is to see whether the resulting farms will be viable in any meaningful economic sense. Let us recall that the average size of ownership holding in India in 2003 was 0.81 hectares; so, the most equitable redistribution will result in the average holding of this size. If instead land is only taken from those owning more than 10 acres and all of it distributed among those currently owning less than 1 acre, then the average size of holding for those receiving redistributed land will roughly become 1.25 acres.
If we juxtapose this with the cost of cultivation data, we can easily see that agricultural units of approximately such sizes will not be economically viable in the sense of being able to generate any surplus product after sustaining a decent level of consumption of the producers. It is extremely doubtful whether these small farms can generate any economic surplus even after the onerous relations of unequal exchange have been removed from the picture. Can they, therefore, help in the industrialization effort by generating surplus or will they instead require a net resource flow in their direction with subsidized credit, power, inputs, etc. to continuously keep them viable? This question is extremely important as was shown in the immediate aftermath of the October revolution in Russia when the revolutionary regime was put in serious jeopardy by a severe food shortage.
The growth of capitalist relations, the continued fragmentation of the land, the decline in tenancy, the unviability of small-scale production and other related factors seem to suggest that a higher form of agrarian development, i.e., collective forms of agricultural production, is gradually being pushed on to the historical agenda of the revolutionary movements in India. Collective, cooperative and socialist forms of large-scale agriculture probably need to be seriously considered as an option emerging out of the very evolution of the material conditions of the vast masses of the working people. The agenda of redistributive land reforms creating bourgeois property in rural areas and facilitating capitalist development needs to be seriously rethought, not because of some ideological reasons but because the development of the agrarian structure seems to demand such a revaluation.
The second large issue raised by our study concerns the mode of industrialization of the Indian economy. It is relatively uncontroversial that a shift of the agricultural population into the secondary and tertiary sectors will be required in order to raise real incomes of the vast majority. How this transformation is to be achieved is the question. The structural transformation required to relieve above-mentioned pressures on agriculture cannot be left to the anarchy of the global capitalist market. The “market-friendly” post-1991 period has been witness to a type of growth that has resulted in rising inequality and increasing number of low-wage, contingent and informal jobs. However the contradictions and problems of the pre-Reform, “planning period” also need to be taken seriously. There is an urgent need to break out of certain simple binaries and equations which have been imposed upon us. The first binary is that between State-managed capitalism and market-oriented capitalism. India’s experience shows that the vast majority of the working population has suffered greatly in both regimes. In our struggle against a particularly predatory type of neoliberal capitalism (whose days may in any case be numbered given the global crisis), we must not find ourselves unwittingly arguing for a return to the bureaucratic and corrupt State. Rather the spectacular failure of the neoliberal model can be an opportunity to demand greater decentralization and more autonomous development. The various people’s movements have been articulating precisely such a model of development.
The second simple equation is between rural areas and agriculture on the one hand, and cities and industry on the other hand. The social and ecological contradictions of the large-scale, capital intensive model of industrialization must be taken seriously. Nowhere has this model produced high levels of employment in an ecologically sustainable fashion while giving producers a say in the running of the workplace. It is becoming increasingly clear that the economic viability of such industrialization is obtained only by cost externalization. The Indian experience points to the necessity for developing dispersed, low capital-intensity, sustainable models of industry that nevertheless raise real incomes of the majority (see Datye 1997 for one such model). This is not a utopian pipe-dream but rather a historical necessity if “development” is not to remain an unfulfilled promise for the majority of Indians.
None of the above can be taken only as a demand for better or more enlightened development policy. Rather it articulates what has already been emerging from social and political movements and in turn seeks to ground the political demands in an empirical and theoretical context. There is a need to extend revolutionary people’s movements rooted in peasant agriculture and national resource struggles into the rural, semi-urban and urban industrial milieu. The urgent question here is how can the dispersed industrial working class be effectively politically organized at a national level? This working class does not always resemble the “classical” doubly-free, urban industrial proletariat. Yet, our attempt here has show that it remains exploited nonetheless and can and should form an important component of left revolutionary politics. Is an artisan-peasant alliance a possibility for the near future?
There is a difference of opinion between the two of us on the question of the model of industrialization that might fruitfully accompany efforts at a radical restructuring of Indian society. While one of us believes, as has been stated in the above paragraphs, that a dispersed, low capital-intensity, sustainable model of industrialization emerges from the Indian experience, the other believes that the scale and geographic dispersal of industrialization per se does not lead to its being more democratic or ecologically sustainable. What is rather more important is the institutional setting within which the industrialization effort is embedded. A small-scale industrialization effort in the context of local level inequalities of class, caste and gender can reinforce those inequalities and nullify all attempts at democratic control of the production process; on the other hand, a large-scale, high capital intensity and centralized industrialization effort within a socialist context might be amenable to democratic control if the institutions of workers’ control are in place. Sustainability, again, seems to have more to do with proper cost-benefit analysis rather than the scale of production as such. In a socialist context, where the surplus product of society is democratically controlled, the pace and direction of technical change will be determined in a rational and scientific manner and not left to the anarchy of capitalist production and the imperatives of profit maximization. In such a setting, internalizing the environmental costs of production would flow naturally from the imperatives of all round social development.
Despite the differing views advanced above, we hope the this study and the accompanying reflections and speculations will serve to fuel discussion and debate among those working for a radical restructuring of Indian society along socialist principles.
(We would like to thanks Debarshi Das and Mohan Rao for helpful comments on an earlier version of the paper.)
Posted by Deepankar Basu November 14, 2008 at 12:17 am in Economic Notes, Economy, USA
Link to Global Economic Crisis-I
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Link to Global Economic Crisis-III
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The Long Term Story
The long term story, as I have already indicated, is a story about the rise and (possible) fall of neoliberalism. The Golden Age of Capitalism – the two and a half decades after the second World War – drew to a close by the late 1960s and global capitalism entered a period of structural crisis. The process of general capital accumulation is largely driven by current and expected trends of profitability of capital (measured by the rate of profit). When the rate of profit declines the process of capital accumulation slows down, heralding a period of crisis of capitalism. The rate of profit had peaked in the early-to-mid 1960s in both Europe and the USA; thereafter, the rate of profit continued to decline for the next decade and a half falling from a high of about 20 percent to a low of around 10 percent.
Structural Crisis of Capitalism
Why did the rate of profit fall during this period? The falling profit rate goes to the heart of capitalism and shows up deep contradictions in the process of economic growth and technical change that accompanies capitalist development. The technological dynamism of capitalism is driven by competition between capitals to increase profits by reducing the cost of production. When the share of wages in national income is high, there is a strong incentive for capitalists to reduce the amount of labour required for production. The Golden Age of Capitalism, being a period of regulated and welfare capitalism, had ensured high and rising real wages and therefore maintained a high and relatively constant share of wages in national income. That provided the incentive for adopting labour saving technical change, i.e., adopting new techniques of production that required less and less labour per unit of output. Labour saving technical change increased the productivity of labour.
But the increasing productivity of labour came at a cost: falling productivity of capital or the output-capital ratio (the ratio of output to capital). Labour saving technical change, which increased labour productivity, was only achieved by replacing labour with capital, i.e., more and more labour was replaced by more and more machines in the process of production. This is one of the characteristic features that we often observe with capitalist development: mechanization and the increasing capital intensity of production. The use of more and more machines that increased labour productivity meant that every unit of output now required less labour but more capital; thus labour productivity increased but capital productivity fell.
This is the pattern of technical change, whereby labour productivity increases but capital productivity falls, that accompanies capitalist development during significant periods of time. This is also the way Marx had described the pattern of technical change under capitalism in his discussion of the process of general capital accumulation in Volume 1 of Capital. That is why economists Gerard Dumenil and Dominique Levy has called this pattern “trajectories a la Marx”, while Duncan Foley and Thomas Michl has called it Marx-biased technical change. But what has this pattern of technical change got to do with the falling rate of profit?
The rate of profit is defined as the ratio of profits to the total stock of capital and can be decomposed as follows:
rate of profit = (profit/capital) = (profit/output)*(output/capital)
Thus we see that the rate of profit is the product of two crucial ratios: (1) the share of profits in output, and (2) the productivity of capital. The share of profits in output, though high, had remained relatively stable through the Golden Age of Capitalism; this is a typical pattern observed under capitalism (other than for the neoliberal period). The productivity of capital, on the other hand, fell because of Marx-biased technical change leading to a sharp fall in the rate of profit, and ushering in a period of crisis for capitalism. The sharp decline in the rate of profit meant a decline in the revenues accruing to all sectors of the capitalist class, especially the top fraction. The neoliberal counterrevolution, the sharp turn in economic and social policy around the mid-1970s, was the response of the upper fraction of the capitalist class to their declining income and power (a more detailed development of this argument can be found in Dumenil and Levy, 2004).
Neoliberal Response as a Prelude to Crisis
The neoliberal turn largely managed to achieve what it had set out to. Profit rates started moving up and the revenue accruing to capital, especially the top fraction of capital associated with the financial sector, increased enormously. But it was a period of unmitigated disaster for the working class. Unemployment rates rose across the capitalist world, wages stopped growing (or slowed down considerably) in real terms, social welfare expenditures were gradually cut down, unions and other working class organizations were “busted”; in short, the social power and revenue accruing to the working class was severely restricted. It was a true counterrevolution which restored the power and privilege of the ruling class.
The two figures below demonstrate this in vivid terms. Between 1950 and 1973, real wages had increased at an annual compound rate of 2.61 percent, closely following the phenomenal growth of labour productivity which grew at an average annual compound rate of 2.70 percent. The next 25 years stand in stark contrast to this. Between 1974 and 1999, labour productivity grew at 1.62 percent per annum while real wages grew at only 0.92 percent per annum. Thus, even though labour productivity growth had slowed down significantly, it was still growing at close to twice rate at which real wages increased. This created a stupendous growth in profit incomes and created the source of finance that was to submerge the US working class in debt for the next four decades.
A crucial aspect of the neoliberal turn was the deregulation of sundry aspects of the economy, including, most importantly, the domain of operation of finance. The last great crisis of capital during the Great Depression had brought forth several important changes and new developments in the regulatory framework of capitalism. One by one, each of these laws relating to the operation of finance, both domestically and internationally, were whittled down or even outright overturned. Thus, the burgeoning profit income and the shredding of all regulation together created the supply of debt finance in the US economy. The demand for debt arose from a working class facing stagnant wage incomes but long used to growing consumption expenditures. The net result was the largest build-up of debt in the US economy since the Great Depression. During the beginning of the Great Depression total debt was about 300 percent of US GDP; in early 2008, total debt in the US economy was touching 350 percent of GDP. It was this huge debt build-up resulting from three decades of neoliberal economic policies that created a systemically fragile financial superstructure which imploded, leading to a credit freeze, when the housing bubble burst (I have borrowed parts of this argument from Wolf, 2008).
(Concluded.)
References:
Dumenil, G. and D. Levy. 2004. Capital Resurgent: Roots of the Neoliberal Revolution. Harvard University Press.
Wolff. R. 2008. Capitalism Hits the Fan. Available here.
Posted by Deepankar Basu November 13, 2008 at 2:43 am in Economic Notes, Economy, Finance, USA
Link to Global Economic Crisis-I
Link to Global Economic Crisis-II
Link to Global Economic Crisis-III
The Medium Term Story
The medium term story of the evolving financial crisis begins at the end of the last century. With the bursting of the dot-com bubble at the end of the 1990s, possibilities of a long recession hovered on the horizon. The Federal Reserve, the Central Bank of the US, moved in with the tools of monetary policy to ease the slowdown. The target for the federal funds rate, the key short-term interest rate that the Fed monitors as part of it’s monetary policy tasks, was gradually lowered from over 6 percent per annum to a little below 2 percent within a span of about an year. Lowering interest rates to engineer a soft-landing for a slowing economy is a natural thing to do: reducing the cost of borrowing funds is a key way the Central Bank can affect the level of investment and consumption (especially of durable goods) expenditures and thereby boost the level of aggregate demand in a slowing capitalist economy. With finance in command, this normal and natural move had a perverse effect.
The effects of the falling federal funds rate gradually cascaded from the short-end to the longer end of the asset market, lowering interest rates on all kinds of contracts. One of the key long-term interest rates affected by this very sensible move of the Fed was the interest rate charged on various kinds of mortgage loans (loans to finance the purchase of homes). With mortgage interest rates falling, consumers not only started purchasing new homes with new mortgage loans but also refinancing their old mortgages. With the demand for mortgage loans increasing, and the increase sustained by a low-interest rate regime, house prices started picking up. Very soon, i.e., within a year or two, economists started noticing a bubble in house prices. There were several indicators of a house price bubble. For instance, the Case-Shiller house price index for 10 US cities – a commonly used price index for houses – increased rapidly since the early 2000s. Even more tellingly, the price-to-rental ratio of houses went through the roof. Between January 2000 and April 2006, the rental of an average house did not increase at all; during the same period, price of an average house increased by about 70 percent, sending the price-to-rental ratio on an upward spiral.
The fact that the price-to-rental ratio increased rapidly gave a clear indication that a house price bubble was building up. People were, in other words, purchasing houses not because of the service provided by a house but because of speculative motives. A rough proxy for the value attributed by consumers to the service provided by a house is the rental rate; since this was not increasing, it meant that people were not valuing the real service provided by the house. But prices of houses were shooting up giving an indication of an increasing demand for houses (relative to supply). Most of this demand was clearly arising from speculative motives; many of the house purchases were for the purpose of selling them off at a later date to reap capital gains (i.e., the profit derived from the difference between the selling and the buying price of the asset). Thus, the rise in prices was not driven by “fundamentals” (i.e., increase in the intrinsic value of the service provided by houses) but largely by speculative motives of capital gains; that is precisely what leads to an asset price bubble and that is what happened.
Sub-prime Mortgage Market
A run of a couple of quarters of rising house prices was very soon incorporated into the expectation formation mechanisms of financial markets. As has been observed over and over again in history, rising asset prices very soon creates irrational expectations that prices will keep rising, rising certainly in the foreseeable future if not forever. Such periods of rapidly rising expectations, feeding primarily on itself, have been labelled as “manias” by economists studying periods of asset price boom-and-bust. Prominent examples of such economists are Charles P. Kindleberger and Hyman P. Minsky, coming, as they are, from very different political traditions. In the context of the early twenty-first century US economy, the unprecedented house price bubble created grounds for the emergence of predatory lending and the sub-prime mortgage market. The sub-prime mortgage market was the market for mortgage loans to less-than-creditworthy borrowers at very high interest rates that often came with hidden but onerous terms. (Useful material on predatory lending and the subprime mortgage market can be found here)
A financial innovation that indirectly helped the emerging sub-prime mortgage market and the practice of predatory lending was “securitization”. Securitization, in the context of the mortgage market, meant pooling together hundreds and thousands of mortgage loans together and then selling bonds on that pool of mortgages. Investors buying those bonds – the mortgage backed bonds – received the income stream, both the principal and the interest, entailed by the mortgages as the mortgage borrowers serviced their debt. Securitization required that the entities, usually investment banks like Bear Stearns or Merril Lynch, that were issuing (i.e., selling) mortgage backed securities (the mortgage backed bonds or other kinds of assets backed by the mortgage pool) needed ownership of the pool of mortgages against which those mortgage backed securities were being issued. Thus, the entities that issued the mortgage backed securities went out and bought mortgage loans from the originators of the mortgages, i.e., those who sold the mortgage loan to the borrower, like Country Wide Financial (the largest mortgage seller in the US prior to the financial collapse).
The fact that mortgage loan originators had a market where they could sell off the mortgage loans they had originated created perverse incentives for the originators. Typically mortgage loan originators do a thorough screening to assess the financial background of applicants before making loans. With the emerging market for selling off mortgages, the effort at screening was reduced to zero. Things actually went even further. Since mortgages could be sold off at good prices to the investment banks, the mortgage loan originators had a incentive to start engaging in predatory lending, i.e., push mortgage loans on persons who they knew would not be able to sustain the payments entailed by the loan. Since the originator did not have to bear the risk of failure associated with non-payment of mortgage loans, they had no incentive to make prudent loans. All they had to do was to force some gullible working class person to agree to the sub-prime loan and then turn around and sell it off to some investment bank in Wall Street. Thus, the market for sub-prime mortgages proliferated, driven by rising demand coming from the Wall Street investment banks. And why were investment banks so eager to buy these sub-prime mortgages? To answer this question, let us look a little more closely at the process and results of “securitization”.
Securitization
Securitization is the division, repackaging and dispersal of debt, earning huge fee income for the entity (usually an investment bank) that is undertaking this process. The process starts with some commercial or investment bank buying a swathe of mortgages, some prime, some sub-prime, from smaller financial institutions and pooling them together. Each mortgage, recall, entails a stream of future payments; so the pool of mortgages, entails some specific stream of future payments. Various categories or “tranches” of bonds, arranged according to their risk characteristics, are then issued against the pool of underlying mortgages, i.e., against the stream of future payments entailed by the pool of mortgages. Investors who buy these bonds (mortgage backed securities) then have the claims on the mortgage payments coming through month after month after month; if some mortgage fails i.e., payments stop the lowest category (i.e., most risky) bondholder loses first, the losses travelling up the tier of the bonds.
Let us look at a specific example: Bear Stearns Alt-A Mortgage Pass-Through Certificate. This is how this mortgage backed security worked. Bear Stearns bought 2871 mortgages from different mortgage originators for a total of $1.3 billion; this mortgage pool had mortgages that had been originated in different parts of the US, each worth on average for $ 450,000. Bear Stearns then pooled these diverse mortgages and issued 37 different bonds against that pool of mortgages; these bonds were called the Alt-A Mortgage Pass-Through Certificates. Alt-A stands for a very specific kind of mortgage: a mortgage where the originator does not ask any questions about the financial situation of the borrower before making the loan. It is not even ascertained whether the person taking the loan has a stable employment or not! Two additional players come into the picture: credit rating agencies and insurance companies.
Since many investors had an idea that the mortgage backed bonds were risky investments, they required some “independent” rating agency like Standard & Poor’s or Moody’s to ascertain the riskiness associated with investing in those bonds. This is one of the typical functions of credit rating agencies: to ascertain the riskiness (i.e., risk of default) of bonds and assign a credit rating to it; credit ratings run from AAA/Aaa (least risky) to C/D (in default). There were two problems with the involvement of credit rating agencies in the whole securitization process. First, there was an acute shortage of reliable information about the mortgages in the underlying pool; recall how the mortgages in the pool had originated in very different geographical locations, had been offered to very different income categories of people. Most importantly, very little information was collected about the financial standing of the borrowers (especially in Alt-A mortgages). So, despite their best efforts, the credit rating agencies could not come up with realistic risk assessment of the bonds issued against the pool of mortgages. The second problem was even more serious: a conflict of interest. Who paid the fees to the credit rating agencies? The same investment banks that issued the mortgage backed bonds; thus, there was a real incentive for the rating agencies to underplay the risk and certify most of the bonds as “investment grade”. That is more or less what happened, as we now know.
The other player in the securitization process was an insurance provider; since investment in mortgage backed securities (and other related assets) carried some risk investors wanted insurance against default. The instrument that was used to provide insurance for such transactions was the credit default swap (CDS), a derivative financial instrument. Suppose an investor bought bonds worth $1 million; then, to insure herself against the possibility of default she could buy CDS from some financial firm like AIG on those bonds. The insurance premium that she had to pay, called the CDS rate or spread, was typically in the range of 1-2 percent of the value of the bonds, $1 million in this case. She would thus pay $ 20,000 (if the CDS rate was 2 percent) and the CDS contract would protect her against default for the period of the validity of the contract (typically a few years). In the bonds were to go into default the firm that had issued the CDS would have to pay her the amount of her losses.
There were several problems with the CDS market. First, it was an over-the-counter (OTC) market and did not operate through an exchange; hence the possibility of monitoring or regulating this market were negligible. All the contracts were bilateral contracts and no one other than the two parties to the exchange could, in principle know the details of the contract. Second, unlike traditional insurance contracts, there were no reserve requirements. Thus, the financial entity selling the CDS was not required, by law, to hold any reserves against the CDS issued, unlike traditional insurance. So, if the CDS were to actually come due there was no guarantee that the firm that had issued the CDS would be in a situation to make good it’s side of the contract. Third, the most bizarre aspect of the CDS market was that the investor buying the CDS was not required to hold the underlying assets.
This third aspect is truly incredible and led to a veritable explosion of speculation. Let us think about this for a minute. It meant that if I believed GM would fail three years down the line, an investor could buy $10 million worth of CDS on GM bonds by paying a fee of $200,000 (assuming a CDS rate of 2 percent); and this the investor could do even though she did not hold any GM bonds. If GM actually failed and her bet was correct she could make $10 million on an investment of $200,000, a phenomenal 49 fold return! One could never expect to make such return by actually holding the bonds, and so investors started making huge bets using the credit default swaps instead of investing in bonds and stocks. By the end of 2007, the CDS market had grown to about $ 55 trillion (about 4 times US gross domestic product).
But who bought the asset backed securities? Who bought the CDS? International investors of all kinds. Around the late 1990s, there was an enormous pool of footloose, speculative capital in the global financial arena. The East Asian crisis, the Russian crisis and several other developing country crises freed up finance for investment in the US; and these investors wanted high returns even if that meant holding risky assets. That is precisely what the Wall Street investment banks were busy churning out: highly risky but high-return investments in the form of the asset backed securities and other more exotic assets. Hedge funds, pension funds, sovereign country funds and other large institutional investors lapped up the exotic assets which promised high returns.
But the whole edifice was built on very shaky foundations. This highly-leveraged investment game could remain profitable if either of two conditions were met: (a) mortgage payments kept coming in, and (b) house prices kept moving up. If mortgage payments stopped coming in, the property could be taken over and sold; hence sub-prime mortgages remained profitable investments even when the borrower was almost certain to default as long as house prices kept moving up. In the middle of 2006 house prices stopped rising and foreclosures started piling up; and then the whole process, the whole speculative game, started unravelling.
To the Short-term once again
With the medium term story more or less under our belts, let us return once more to the short term story and ask: why did Bear Stearns fail? Why did Lehman Brothers fail? Why was Fannie and and Freddie nationalized? What caused the near-collapse of AIG? Bear Stearns and Lehman Brothers went under for very similar reasons: they could not keep borrowing to finance their positions. Towards the end of it’s life, Lehman was rolling over close to $ 100 billion a month to finance it’s investments in real estate, stocks, asset-backed securities, bonds and other financial assets. When news of foreclosures started pouring in, investors became convinced that Lehman had big holes in it’s balance sheet because of it’s exposure to the sub-prime mortgage market. They refused to lend it money; thus it’s cost of borrowing went up, it’s stock prices plummeted and it’s credit rating was dropped. With no other option left, it had to file for bankruptcy on September 15, 2008.
Fannie Mae and Freddie Mac were government supported entities (GSEs) that were created to help low-income homeowners get easy access to the mortgage market. They were meant to guarantee mortgages and was supposed to finance this operation by issuing it’s own bonds which were implicitly backed by the US government. It is now clear that they did not stick to this mandate of theirs. Instead, they used the subsidized loans that they could get from the market (due to the implicit government guarantee) to invest in mortgage backed securities which were backed by pools of sub-prime mortgages. When the sub-prime mortgages started failing, these institutions started losing asset values and it became clear by mid-2007 that they could not sustain the mounting losses. At that point the government stepped in to explicitly guarantee their debt (because it was spread far and wide in the global financial system) which finally culminated in their nationalization.
AIG, the largest insurance company in the US, got into serious trouble because of the credit default swaps that it had written. Around mid-September, about $ 57 billion of insurance contracts that it had written, in the form of CDS, required it to raise serious money. The CDS were all written on bonds linked to pools of sub-prime mortgages and as the sub-prime market worsened, the possibilities of the CDS payouts coming due increased. Because of the possible losses that it could incur, credit rating agencies downgraded AIG. The way the CDS contracts were written, a credit downgrade required AIG to demonstrate that it was capable of making good on it’s contracts; this required it to immediately “post collateral” to the tune of $ 15 billion; if it failed to post collateral, it would be considered bankrupt. Since it did not have that amount of reserves and could not borrow from a tightening credit market, it had to approach the Fed for funds.
Bubble bursts: Delevarging and Deflation
An aspect of the whole build-up that made the unravelling especially painful was the stupendous amount of leverage in the financial system. When the bubble was inflating every investment was so hugely profitable that investors borrowed heavily for investing. This was especially true of the investment banks whose leverage (i.e., ratio of debt to equity) was about 30:1 by 2007; thus, for every dollar of equity these institutions had borrowed 30 dollars. And a large part of the borrowing was at the shortest end of the market. This meant that the investment banks had to continuously borrow from the market (usually roll over their debt) in order to keep financing their assets and investments. This made the system extremely fragile because any serious problem would lead to painful deleveraging (i.e., forcibly reducing debt by various means often involving serious financial loss) and possibly even asset price deflation.
As foreclosures picked up speed, house prices started moving down. Defaults on mortgage payments and falling house prices meant that the mortgage backed securities started losing value. Often this meant that when lenders came knocking on the doors for their funds, assets had to be sold at short notice and at low prices to cover debt payments coming due. A rush to sell assets often led to a further fall in the value of assets, even those not linked to mortgage backed securities, leading to worsening balance sheets in wider and wider circles. With bonds losing value and even facing default, the CDS contracts suddenly started coming into effect. Since CDS issuers like AIG had not held any reserves for such contingencies, they got into greater and greater difficulties as bonds insured by CDS contracts started failing.
Falling assets values meant that financial firms faced greater difficulty in borrowing from the market, partly because the value of assets that they could offer as collateral had already fallen. Falling collateral value often lead to increasing costs of borrowing in terms of higher interest rates. Difficulty is accessing funds gives another push to sell off assets to cover debt payments, taking the spiral one step down. Deleveraging and an asset price deflation and a string of failures and rescues really led the financial system, in mid-September 2008, to completely lose faith in itself; it is this severe loss of confidence that manifested itself in the credit freeze, the center piece of the short-term story.
(To be continued.)
Posted by Deepankar Basu November 11, 2008 at 12:26 am in Economic Notes, Economy, USA
Link to Global Economic Crisis-I
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The Need for Aggressive Fiscal Intervention
Before we move on to looking at the global economic crisis from a medium term perspective, i.e., before we take a look at the phenomenon of the house price bubble and associated speculation that created the grounds for the current credit crisis, it might not be amiss to focus on what can be done in the short-run to deal with the real consequences of the economic crisis: the deep and prolonged recession that the US economy will undoubtedly be pushed into. Real GDP figures released by the US Bureau of Economic Analysis (BEA) on October 30 indicated that the US economy was in the midst of a slowdown even before the financial storm hit the world economy in the middle of September. Real GDP in the US contracted at an annual rate of 0.3 percent for the third quarter (i.e., for the months of July, August and September), led by a sharp fall in consumer spending; businesses cut 240,000 jobs in October alone, the highest figure in 14 years. The financial storm, comprising a severe credit crisis and even a possible banking crisis, worsened the slowdown further. In such a scenario, fixing the financial mess, dealing with the credit freeze, averting a possible run on the commercial banking system and restoring confidence in the financial system will not be enough to prevent a plunge into a deep, prolonged and painful recession; addressing the credit crisis is necessary but not sufficient to deal with the grave crisis in the real sector. A direct and aggressive boost to aggregate demand is the only way to prevent the current recession from becoming a depression. Why is that so?
In any capitalist economy, such as the US economy, the level of aggregate economic activity and employment is determined, in the short run, by the level of aggregate demand, and fluctuations in employment and output are accordingly determined by fluctuations of aggregate demand. Aggregate demand is defined as the sum total of all expenditures on goods and services produced in the economy. Macroeconomists divide total expenditure that make up aggregate demand into four categories: consumption expenditure, investment expenditure, government expenditure and net export expenditure. Consumption expenditure is the total spending by households on durable and non-durable goods, and also services; investment expenditure is the total spending by firms on plant, equipment, machinery and inventories, and the residential investment expenditures by households; government expenditure includes the total spending by local, state and federal government agencies on goods and services (excluding transfer payments); and net export expenditure is the net amount that foreigners spend on buying goods and services produced in the domestic economy.
BEA figures released for the third quarter show that every component of aggregate demand emanating from the private sector of the US (or foreign) economy either declined or slowed down when compared to the second quarter. In real terms, consumption expenditure decreased by 3.1 percent, the steepest decline since 1980 when the US economy was in the grip of a severe recession; during the previous recession in 2001, consumption expenditures had not even declined. Investment expenditures, other than those devoted to maintaining inventories, have also declined. Real nonresidential fixed investment expenditures decreased 1.0 percent in the third quarter, in contrast to an increase of 2.5 percent in the second. Expenditures on nonresidential structures increased by 7.9 percent, compared with a much higher increase of 18.5 percent in the last quarter; expenditures on equipment and software decreased 5.5 percent. Real residential fixed investment decreased 19.1 percent, compared with a decrease of 13.3 percent in the second quarter. Demand emanating from the external sector has a similar story to tell: even though exports registered a positive growth, the growth had slowed down considerably falling from 12.3 to 5.9 percent.
This is hardly surprising. With credit drying up, home equity vanishing and layoffs increasing, working-class households cannot be expected to increase their expenditures on the purchase of goods and services; a continued decline in the stock markets, coupled with increasing volatility will make matters worse. A recent survey in the US showed that consumer confidence was at it’s lowest value in 40 years, and so it is almost certain that consumption expenditure will not rise in the foreseeable future. Neither will export expenditures rise to shore up aggregate demand because most of the economies in the world are either already into a recession or are rapidly slowing down. Nor can firms be expected to increase their expenditures on plant and machinery and equipment. And the problem here is more than a credit freeze: even if the credit markets were to ease due to government intervention, which it is adamantly refusing to do, firms might not be willing to expand their operations because they face sagging demand. Capitalist firms produce to make profits; if they expect markets to be down and demand to fall, they will cut back and not increase their expenditures even if the cost of financing goes down.
That leaves us with government expenditure as the only source for increasing aggregate demand. In the midst of possibly the worst economic crisis since the Great Depression, the US government needs to aggressively step up it’s expenditure on goods and services; since private expenditures, either of firms or of households, cannot be expected to increase in the short-term, aggressive fiscal intervention seems to be the only way the US government can prevent the economy from sliding into a decade long L-shaped recession that was Japan’s fate in the 1990s. Moreover, such expenditures are warranted even from a long-term perspective of economic growth. Rebuilding the crumbling public infrastructure like roads and bridges, improving and widening the ambit of the public transport systems in US cities, jump-starting the movement towards green technologies, making health care available to all working-class Americans, increasing the unemployment benefit substantially, investing in the educational infrastructure makes both short-term and long-term sense. It will help boost aggregate demand in the short run and prevent a slide into a prolonged recession, and in the long run it will build the physical and human capital to help take the US economy into a higher growth trajectory.
Two alternatives to boost the economy, which are often brought up in this context, also seem to have lost their efficacy: tax breaks and monetary policy. Tax breaks have already been tried out and does not seem to have worked; reeling under mountains of debt, the tax break (or refund) cheque is often used by households not for making new purchases but for reducing the outstanding debt. The second alternative, monetary policy action, is also rapidly reaching the point where it will become totally ineffective. For it is almost certain now that the US economy is already stuck in what John Maynard Keynes long ago called a liquidity trap, a situation where the Central Bank can no longer boost aggregate demand by reducing interest rates. The Fed has already reduced the target federal funds rate to 1 percent and reducing it further to 0 percent, the lowest it can go, will possibly not help. Even if confidence in the financial system is restored and nominal interest rates lowered, this might not increase borrowing by firms because of their bleak forecast of falling demand for the goods they produce. Monetary policy has reached it’s limits; the only option to ward off a severe recession and decrease the pain on the working class seems to be aggressive fiscal intervention in terms of direct expenditure on goods and services by the US government.
(To be continued.)
Posted by Deepankar Basu November 5, 2008 at 12:38 am in Economic Notes, Economy, Imperialism, USA
Link to “Global Economic Crisis-I”
Short-term: The Sequence of Events
Even though the credit crisis attained dangerous proportions only in mid-September, it had already announced itself in the early part of the year with the collapse of Bear Stearns, one of the five famed investment banks that defined Wall Street; today none of those five investment banks – Bear Stearns, Goldman Sachs, Lehmann Brothers, Merril Lynch and Morgan Stanley – exist, an indication of the depth of the crisis. Faced with a fierce run on it’s dwindling reserves and it’s stock plummeting, Bears Stearns was forced to sell itself off to J P Morgan Chase (one of the largest commercial banks in the US) on March 16, 2008. The next three months could be best described in terms that the police often use in India: tense but under control. On July 01, the next piece of bad news emerged and shattered the uneasy calm: Country Wide Financials, the largest mortgage seller in the US, collapsed and was acquired by Bank of America (one of the largest commercial banks in the US). Following closely on the heels of this event, IndyMac bank failed – the second largest bank failure in US history – and was taken over by the Federal Deposit Insurance Corporation (FDIC), one of the institutions responsible for monitoring the health of the banking system in the US. IndyMac was, unsurprisingly perhaps, part of the Country Wide financial family.
Things started speeding up in September. On September 08, Freddie Mac and Fannie Mae, the two government supported enterprises (GSE) operating in the mortgage market was nationalized, with assets of the two entities totalling to more than $ 5 trillion. On September 15 another of the five famed investment banks, Lehmann Brothers, filed for bankruptcy; Lehmann’s assets were a little over $ 600 billion and this made it’s bankruptcy filing the largest in US history. Next day, the Fed stepped in with a $ 85 billion loan to prevent American International Group (AIG), the largest insurance firm in the US from going under. These two events, Lehmann’s bankruptcy filing and AIG’s rescue, sent shock waves through the world financial system. The result was a rapid erosion of faith in the financial system leading to a veritable credit freeze: financial institutions stopped lending, to other financial institutions, to businesses and to consumers.
The next thirty six hours, from the morning of September 17 to the evening of September 18, accelerated the credit crisis to extremely dangerous proportions and convinced the US Treasury and the Federal Reserve that government intervention of unheard magnitudes (at least since the Great Depression) would be necessary to prevent total financial collapse. Ben Bernanke, the chairman of the Federal Reserve (the US Central Bank), was famously reported as saying, at one point during this 36 hours, that if the government did not save the (financial) markets now there might not be any financial markets in the future. So, what happened during those crucial 36 hours?
The crucial 36 hours
The first indication of a severe stress in the financial system was a shooting up of credit default swap (CDS) rates, especially on Morgan Stanley and Goldman Sachs (two of the famed five Wall Street investment banks) debt, during the early hours of September 17. Credit default swaps are insurance contracts that can protect bondholders against the possibility of default. For example if an investor has bought bonds worth $ 1 million issued by firm A, then the investor can also buy CDS – typically issued by financial institutions like large commercial banks, investment banks or insurance companies – to protect herself against a possible loss resulting from firm A defaulting on it’s bonds; the premium that the investor pays for the CDS is called the “rate” or “spread” and it is typically around 2% of the amount insured (the “notional value”). So, in the case of this example, the investor would pay $ 20,000 to buy CDS and if firm A were to go under, then the “counterparty” to the CDS contract (i.e., the financial institution that issued the CDS to the investor) would step in to pay the investor $ 1 million and the interest on that amount.
CDS rates (i.e., the premiums that are paid on the insurance contracts) are, thus, an indication of the market’s belief about the possibility of default of some institutions; CDS rates on bonds issued by firms are typically low when the market thinks the probability of default of those firms are low and high when the market thinks the probability of default are high. Thus, on the morning of September 17, when CDS rates went through the roof, this provided evidence of severe loss of faith in the financial system.
When investors lose faith in the financial instruments issued by private parties, they turn back to those issued by the government and that is what happened when CDS rates multiplied by close to a factor of five. Investors let go of private financial instruments like hot bricks and rushed into US government securities, a phenomenon often described as “flight to safety”. The US government, i.e., the US Treasury department, issues three primary kinds of securities: T-bills, T-notes and T-bonds (where the “T” stands for Treasury), where bills mature in less than a year, notes mature between one and ten years and bonds are of longer maturities than a decade. When investors lost faith in the private financial system, they rushed in to US T-bills, the short-run heavily-traded ultra-safe US government securities. This huge rush into T-bills pushed up the price of T-bills and drove the yield (i.e., interest rate) on T-bills down. At one point in time, during this 36 hour period, the yield on T-bills was pushed down all the way to zero (the lowest it can ever go to) implying that investors were willing to hold T-bills even though the nominal return was zero and real returns were negative (because the inflation rate was positive).
As private investors were madly rushing into the safety of US T-bills, another important event was unfolding in the mutual funds market. Money market mutual funds (MMMF) are financial institutions that have become popular over the last three decades, especially in the US. They typically work as follows: investors put their money in MMMF’s by purchasing shares in the MMMF’s stock; thus the MMMF becomes a mechanism for pooling huge amounts of money and then using those large sums for investing in a very diversified portfolio of financial assets, thereby making the investments extremely safe. Thus MMMF’s were, till September 17, thought to be as safe as a deposit account in a commercial bank, and the added advantage was that the money invested in MMMF shares would give a positive rate of return as opposed to a deposit account which is usually non-interest bearing. On September 17, one of the oldest and largest MMMF’s, Reserve Primary Fund, “broke the buck”, i.e., it made losses on it’s investments such that it could not guarantee a positive return to it’s shareholders. Every dollar invested in Reserve Primary was now, by it’s own admission, worth less than a dollar. This was an unheard of event and as news of Reserve Primary Fund’s losses spread, investors started pulling money out of MMMFs.
This had a very negative consequence for the real economy because of the serious involvement of MMMFs in the commercial paper (CP) market. Businesses typically need to constantly borrow short-term funds to keep their operations going; these borrowed funds go towards funding payroll, paying suppliers, maintaining inventory, etc. Firms, at least the big ones, usually borrow short-term funds in the US by issuing commercial paper (which is essentially a bond with a short maturity of about a week or a month). Who buys commercial papers? The most active institutional investors in the CP market are the MMMFs; some of the largest chunks of commercial papers are bought by the MMMFs. So when the MMMFs faced an increasing spate of withdrawal, in the wake of Reserve Primary Fund’s breaking the buck, they stopped buying commercial paper. This, essentially, meant that the CP market ground to a halt. Thus businesses were no longer able to borrow the short-term funds that they need to keep operating. The economy, by all means, shut down.
Adding to and going hand-in-hand with these processes were the growing problems in the interbank (lending) market. Commercial banks typically lend and borrow banking system reserves (roughly the sum of currency in the banks’ vaults and the amount they hold in their account with the Central Bank) among themselves for very short periods, usually overnight periods. The interbank lending market that is most closely watched is the London interbank market and the rate at which loans are made in this market is the London Inter Bank Offered Rate (LIBOR). The most important characteristic of loans in the interbank market is that they are unsecured, i.e., they are not backed by collateral. Thus, a bank can get a loan in the interbank market only if other banks consider it financially sound; thus when the LIBOR jumps up suddenly it provides evidence that the largest and the best banks in the world have lost faith on each other. On September 17, the LIBOR shot up giving indication of increasing strain in the interbank market.
It was these sets of events – CDS rates shooting up, closing down of the CP market, increasing strain in the interbank market – that spooked the US administration and convinced them of the necessity of the most extensive government intervention in the financial markets since the Great Depression. These crucial sets of events were precipitated by the string of big financial failures that the US economy had witnessed over the first two weeks of September: the failure of Fannie and Freddie, the bankruptcy of Lehmann and the near-collapse of AIG. It was these failures that led to a rapid loss of faith in the financial system and heralded a full-blown credit crisis. And why did Fannie and Freddie and Lehmann and AIG fail? All these financial institutions failed because at crucial points in time they could no longer raise money from the market to finance their assets, i.e., they could not borrow money or roll over their short-term debt; financing, for these institutions, had dried up. And why did financing dry up for these big and reputed financial institutions? Because each of these, in their own ways, were exposed to the subprime mortgage market and took huge losses when the subprime mortgage market started unravelling. As news of these failures spread, investors, fearing losses, became increasingly unwilling to lend money to these institutions.
(To be continued.)
Posted by Deepankar Basu November 1, 2008 at 6:36 pm in Economic Notes, Economy, Finance, USA, Working Class
The global economic crisis currently underway is, by all accounts, the deepest economic crisis of world capitalism since the Great Depression. It is necessary for the international working class to understand various aspects of this crisis: how it developed, who were the players involved, what were the instruments used during the build-up and what are it’s consequences for the working people of the world. This understanding is necessary to formulate a socialist, i.e., working class, response to these earth shaking events. In a series of posts here on Radical Notes, I will share my understanding of the on-going crisis as part of the larger collective attempt to come to grips with the current conjuncture from a socialist perspective, to understand both the problems and the possibilities that it opens up.
The Big Story
The current crisis can possibly be fruitfully understood if measured against different time scales: the short-term, i.e., in terms of days and weeks; the medium-term, i.e., in terms of months and years; and the long-term, i.e., in terms of decades. This analytical compartmentalization into three different time periods is useful because it demonstrates how long-term trends silently but inexorably created the conditions for the medium-term problem to explode into the short-term problem that has buffeted the economy since mid-September, 2008.
In the short-term, the current financial meltdown is a severe credit crisis, a situation whereby financial institutions have become unwilling or unable to lend and borrow among themselves thereby freezing the flow of credit in the entire economic system; this credit freeze is largely fuelled by a serious loss of faith in financial institutions and in the financial system as such and came to the fore most forcefully in the middle of September, 2008. It is also possible that the credit freeze, and the underlying loss of faith, might explode into a full-blown banking crisis: banking panic leading to run on even healthy and solvent banks.
In the medium-term, the crisis is the unravelling of a stupendously leveraged speculative bubble on real estate that built itself up for about seven years from the beginning of this decade (and century); this speculative bubble was mediated by fancy financial instruments fashioned by Wall Street, running all the way from sub-prime mortgages, asset backed securities (ABS) and mortgage backed securities (MBS), collateralized debt obligations (CDO) to credit default swaps (CDS); this speculative bubble led up to and culminated, when it finally burst in the middle of 2007, in the credit crisis that the US, and gradually the global, economy finds itself in.
From a long-term perspective the present crisis is, of course, more than just about Wall Street and finance and banking; it is a full-blown crisis of the neoliberal turn in capitalism inaugurated the 1970s. Neoliberalism (or the neoliberal counterrevolution) was a response to the structural crisis of capitalism that emerged in the late 1960s. It was a response from the point of view of the upper fraction of the capitalist class, a fraction especially dominated by financial interests. The neoliberal counterrevolution ushered in a capitalism firmly under the sway of finance capital; the neoliberal policy turn was geared towards breaking the power of labour vis-a-vis capital that had gradually built up during the two decades after World War II. The result was stagnant real wages, slow but growing productivity, and hence growing profit incomes especially of the financial sector, increasing financialization and a deregulated economy for finance to operate in.
Stagnant wages created the demand for debt from a working class used to growing consumption spending; huge profit incomes and the shredding of all regulation on finance created the supply. The result was a growing role of debt in the lives of the working class which, over time, led to a huge debt overhang on the entire economy. As the ratio of outstanding debt to income rose, with stagnant incomes for the majority, the financial fragility of the entire system increased; and it is this systemically fragile financial architecture that finally cracked under the weight of the bursting housing bubble. Thus, the long-term build-up of debt in the US economy resulting from the neoliberal counterrevolution, which increased the financial fragility of the system, created the conditions in which the bursting of various asset price bubbles could lead to a severe credit crisis and loss of faith in the entire financial system.
Impact on the Real Economy
Real GDP figures released by the US Bureau of Economic Analysis (BEA) on October 30 indicated that the US economy was in the midst of a slowdown even before the financial storm hit the world economy in the middle of September. Real GDP in the US contracted at an annual rate of 0.3 percent for the third quarter (i.e., for the months of July, August and September), led by a sharp fall in consumer spending. The financial storm, comprising a severe credit crisis and even a possible banking crisis, will only deepen the slowdown and might even push the US and the rest of the world into a prolonged and painful recession, possibly even a decade long L-shaped recession like the one that Japan witnessed during the lost decade of the 1990s. In such a scenario, fixing the financial mess, dealing with the credit freeze, averting a possible run on the commercial banking system and restoring confidence in the financial system will not be enough to prevent a plunge into a deep, prolonged and painful recession; addressing the credit crisis is necessary but not sufficient to deal with the grave crisis in the real sector. An aggressive fiscal intervention by the US government and other governments around the world, in terms of direct expenditure on goods and services, will be necessary to prevent the slide into a prolonged recession. It is in the interests of the working class to push for such intervention even as it works towards re-building it’s political, social and economic institutions.
(To be continued.)
Posted by Deepankar Basu October 31, 2008 at 2:07 am in Agrarian Question, Economic Notes, Economy, India
Political Economy of Contemporary India
Dipankar Basu and Debarshi Das
Sifting through the divergent viewpoints thrown up by attempts to make sense of the recent political history of West Bengal, one is led to the conclusion that the tumultuous events have taken many, if not most, by surprise. With the benefit of hindsight one can probably say this: a combination of an insensitive state power, an arrogant ruling party, lapping-it-up corporate interests, and cheerleaders-of-corporate-sector-doubling-up-as-media orchestrated a veritable assault – a perfect storm. Yet the peasantry, initially without the guiding hand of a political party – indeed at times against the writ of the party – fought on. Through this episode Indian political economy seems to have stumbled upon the peasantry while it was looking for a short-cut to economic growth through SEZs.
At the level of political practice this serendipity demonstrates lack of an organic link between the representatives of people and those they claim to represent. The Trinamul Congress, whose manoeuvrings range from rightist alliances at worst to unprincipled populism at best, was slow to react; but it learnt the ropes eventually. A nagging doubt remains though, as to whether it would not, at the end of the day, appropriate the movement and sell it off to the highest bidder. The charge is of course more serious against the communist parties. If confusion of politics was not bad enough, the largest party of the state failed to gauge the pulse of the people whose land it was taking. The Congress Party has perhaps been the most rudderless of the lot – veering towards resistance at one moment, getting pulled back by the central leadership at the very next.
At the level of theorisation too, things are in a flux. A case in point is noted political scientist Partha Chatterjee’s article in Economic and Political Weekly[1], which tries to present a novel reading of contemporary Indian reality and a new framework to comprehend it with. We shall present his position briefly and then examine it critically in our own attempt to throw some light on contemporary Indian reality.
Partha Chatterjee’s Analysis
Partha Chatterjee (PC henceforth), by his own admission, used to perceive the Indian peasantry as being endowed with a change-resisting character. External agencies such as the state or market forces were sought to be barricaded away, often successfully. But that has changed over the last twenty five years. Liberalisation of the economy, it’s incorporation into networks of the global flow of goods, services and capital, and more recently events like Singur, Nandigram, Kalinganagar, etc. have compelled PC, and Kalyan Sanyal, whose book he often refers to, to reconsider such a position.
Reconsideration of the earlier position leads him to discover that the state was not that external to rural society after all; that the rural economy has come fully under the sway of capital, and that the rural poor do leave villages for cities due to social, and economic compulsions [2]. These new trends, according to PC, have emerged and consolidated themselves over the last three decades. Another concomitant and noteworthy development is that market forces seem to have gained phenomenal power. The balance of state power between corporate capital and the landed elite has decidedly tilted in favour of the former. The managerial-bureaucratic class, i.e, the urban middle class, has also aligned itself with the interests of big capital. Straddling all these changes and in a sense providing an overarching theme of current economic reality in India is the process of primitive accumulation of capital.
Sanyal however avers, and PC concurs, that the primitive accumulation of capital that is underway in India today is very different from the classical variety of the same process. One of the major differences, according to PC, is that the dispossessed, separated from the means of production, can no longer find gainful employment in industry due to limitations of present day capital-intensive technology [3]. This is bad news for the ruling dispensation as social unrest may break out. Old tactics of armed repression is ruled out, because the globally accepted norm is to provide succor to the victims of primitive accumulation and not shoot them down. Compulsions of electoral democracy, which demands that even voters bereft of livelihood be heard, is an additional constraint. Thus, caught between the pressures of the global discourse on development and the demands of electoral democracy, the State adopts the role of transferring resources from the accumulating economy of corporate capital to the dispossessed masses, thereby reversing the effects of primitive accumulation.
We are therefore left with a curious situation. Corporate capital is dispossessing millions through primitive accumulation, but the dispossessed are neither getting absorbed into industry nor getting socially transformed, as they were supposed to, through proletarianisation. This floating mass of labour, this enormous but shifting population of potential workers have instead become a constituent of what PC calls “political society”. Owners of small capital – PC prefers the term non-corporate capital – along with small and marginal peasants, artisans, and small producers are important constituents of political society.
But political society, according to PC, is different from civil society; corporate capital hegemonises the urban middle class which forms civil society. Its support for pro-capital policies is unstinting. Demand for civil and democratic rights define its political agenda. Political society, on the other hand, is hardly a constitutionally valid entity. Its constituents do not enjoy the rights due to citizens; hence they do not qualify for membership of civil society. The economic precariousness of political society, accentuated by primitive accumulation, forces it to use various ploys to negotiate with the State. For the State, on the other hand, electoral compulsions of representative democracy is a binding constraint. Thus the State often looks the other way when negotiations with political society violates established civil society rules (urban squatters, and street vendors are a case in point, as PC mentions). But in the agrarian economy the degree of political consolidation is lower; therefore dependence on the hand-outs of the State is more pronounced. This does not however imply, PC mentions, that they are incapable of rallying on emotive issues and thereby nullifying the government’s machinations to divide and break. It is in the dynamic interaction between the civil and political society – which often coincide with corporate and non-corporate capital for PC – and in the success of the State in holding the two together through measures of “governmentality” that PC identifies the fate of the present political regime.
Some Comments
There are many points which are commendable about the article: acute observations, theoretical insights, incisive analysis and a crisp clear prose. For instance, some of the important observations worth highlighting and thinking about are: landed elite losing ground vis-à-vis the bourgeoisie, the breath-taking ease with which the urban middle class traded Nehruvian consensus for the Washington consensus, the accompanying depoliticization, and the rising friction between this class and the poor etc. These observations underline the sharp analytical prowess of one of the foremost social scientists of the country. But there are surprises and disappointments too and to these we now turn.
The biggest problem with PC’s analysis, we feel, is the questionable theoretical framework that he works in, a framework that he has borrowed from Kalyan Sanyal (KS henceforth). KS starts his analysis by pointing out that what is going on in contemporary India can be fruitfully understood as the primary (or primitive) accumulation of capital, in the sense in which Marx used that term in Volume 1 of Capital. We fully agree with him here; in fact one of us had argued along those lines some time ago [4]. The defining feature of the process of primary capital accumulation – forcible separation of primary producers from the means of production – is difficult to miss in developments in contemporary India. KS notes that all previous attempts at theorizing primary capital accumulation have been embedded in what he calls a narrative of transition. Thus, primary capital accumulation has always been seen, according to KS, as marking a transition, a transition from one mode of production to another, either a transition from feudalism to capitalism, or “from pre-capitalist backwardness to socialist modernity.” But “under present conditions of postcolonial development within a globalised economy, the narrative of transition is no longer valid”; that is “although capitalist growth in a postcolonial society such as India is inevitably accompanied by the primitive accumulation of capital, the social changes that are brought about cannot be understood as a transition.” And why is that so? This is because it is no longer acceptable, or so KS believes, that people dispossessed and displaced due to primitive accumulation should be left with no means of subsistence. And what makes the destitution and poverty of the people displaced by primary accumulation unacceptable? The current international context marked by the dominance of the discourse of development and human rights.
Alongside the process of primary accumulation, therefore, KS discovers a parallel and related process: intervention of the State to reverse the effects of primitive accumulation. Government agencies, in other words, step in to create conditions for ensuring the “basic means of livelihood” to those who have been dispossessed and displaced by the process of primary accumulation of capital. Thus there is, according to KS, two processes going on in parallel, “primitive accumulation” and a “process of the reversal of the effects of primitive accumulation.” It is the conjunction of these two parallel processes, according to KS, that invalidates the narrative of transition associated with the primary accumulation of capital.
The implication of this assertion, the assertion that the primary accumulation of capital can no longer be understood in terms of a narrative of transition, is stupendous. It means that current political economic processes underway in India will continue indefinitely; historical change, for KS, seems to have been stalled. Since current day reality cannot be understood as a process of transition, this would then seem to imply that Indian reality will remain unchanged in its essentials for a long time to come, if not forever. In more concrete terms, this will mean the presence of the huge mass of working people parked in the no man’s land between agriculture and industry for an indefinite amount of time, a population that has been simultaneously dispossessed by the primary accumulation of capital and provided an alternative “means of livelihood” by the postcolonial State.
As a description of contemporary Indian reality, this account probably has some intuitive appeal. After all it can hardly be denied that one of the most important characteristics of contemporary India is the huge population of what economists have called “surplus labour”: the huge population of working people who find stable, well-paying employment neither in agriculture nor in industry nor in services. Though KS’s analysis apparently attempts to understand this phenomenon of “surplus labour”, by all accounts the defining characteristic of contemporary Indian reality, it is, we believe, seriously flawed.
First: the Indian economy has been characterized by surplus labour for the past two centuries, it is not a new phenomenon; the primitive accumulation of capital was initiated under the long shadow of colonialism and ever since that time dispossession has been going on without commensurate absorption of the displaced labour in industry. In that sense the current scenario has a historical dimension that KS, and thereby PC, completely misses when he (a) locates the beginnings of this process somewhere in the recent past, and (b) identifies the supposed ameliorative interventions of the State in reversing the effects of primary accumulation in the current conjuncture as one of the crucial factors to reckon with.
To be sure, PC, identifies three factors that are different today from the time when Western Europe underwent primary accumulation of capital. First, there were opportunities for international migration of the surplus labour that are totally absent today; second, the technology of the early industrial period was far less capital intensive than current technology and hence had the capacity to absorb far more of the surplus agricultural labour than is possible today; third, the State did not intervene in Western Europe to reverse the effects of primary accumulation as it is doing today in India. Though the first two factors were present in Western Europe and contributed to mitigating the problem of surplus labour, they are not necessary. Japan and the Soviet Union had taken care of primary accumulation, and had industrialized, without having to export surplus labour to its colonies and using much more capital intensive technology that was used during the industrial revolution in Western Europe; South Korea had taken care of primary capital accumulation, and had industrialized, with much more capital intensive technology than Britain had used during its own industrialization and without the assistance of international outmigration of its surplus labour. Therefore, the absence of opportunities for international migration and the use of technologies with relatively higher capital intensity cannot explain the absence of industrialization and the continued existence of surplus labour in India. The answer lies somewhere else, in the domain of capital accumulation. In a dynamic context, the rate of absorption of labour, i.e., the growth rate of the demand for labour, depends on the rate of accumulation of industrial capital. Neither the lack of international migration, nor the increasing capital intensity of technology nor the ameliorative interventions of the State can explain the burgeoning ranks of surplus labour; it is the absence of a sufficiently rapid rate of growth of industrial capital in India that is responsible for the continued existence of surplus labour. This crucial factors is totally missing in KS’s and PC’s analysis
The primacy of capital accumulation becomes obvious once we look back at history and realize that dispossession without proletarianization is not a novel phenomenon. One just needs to recall that one of the principal issues raised by the Mode of Production Debate [5] was why India did not make the transition to capitalism despite being sucked into the global network of trade and commerce with the onset of colonialism. The answer, of course, is now well known. As colonial incursion willfully destroyed the socio-economic fabric of the country, peasants were evicted and deindustrialization, facilitated by the trade policy of the colonial State, exacerbated the pressure on land. But the economic surplus which was being generated in the process was largely siphoned off to the metropolis. Thus, in the colony, processes leading up to the formation of productive capital were conspicuous by their absence. Petty producers who were getting alienated from the means of production were joining the ranks of paupers, not those of the working class. Without a strong capital accumulation process, the excess labour could not be absorbed into profitable industrial activities; that is the historical basis of “surplus labour” in the Indian economy. One may refer to the mode of production in India using any term one wishes, as pre-capitalist, or semi-feudal, or semi-capitalist, or postcolonial, or something else, but the main point remains beyond dispute: absence of the growth of industrial capital and a concomitant growth of the industrial working class.
Somewhat related to this point about “dispossession without proletarianization” is the implicit assumption in PC’s analysis that peasant society had been stuck in splendid isolation till about the beginning of the era of liberalization; this is one of our major points of criticism of PC’s analysis that we wish our readers to ponder. The trend of viewing the peasantry in this manner, especially the middle peasants who are not very much dependent on the labour market for selling or buying labour, owes a great deal to the work of the Russian economist Chayanov [6]. But the putative efficiency of the peasantry sits oddly with the massive and recurrent famines India underwent as colonial rule tethered the country to global commodity markets. This position about the supposed insularity of the peasantry seems even more unconvincing when one recalls the state’s successful promotion of Green Revolution in north and northwest India starting in the mid-sixties. Nor does it seem consistent with Operation Barga in West Bengal, another orchestration of political parties and the state machinery, which was leaving a deep impact on rural Bengal right at the time when Subaltern Studies was undergoing its genesis.
To move on to another major problem in PC’s theoretical framework recall that one of the crucial links in PC’s chain of argument relates to the supposed interventions of the State in reversing the effects of primary accumulation; this, to our mind, is the weakest link in the whole chain of arguments that PC offers in his paper; there are both theoretical and empirical problems with this argument.
First:
PC, and many other scholars (including KS), we feel, seem to have misunderstood the notion of primary accumulation of capital. Primary accumulation of capital, as understood by Marx (in Volume 1 of Capital), is the forced separation of producers from the means of production. Whether this “free”, evicted (peasant) labour gets absorbed in industrial activity is a different question, it is not part of the process of primary accumulation. It depends on the pace of capital accumulation, as we have already pointed out. So, the assertion – implicit in PC’s analysis – that the “classical” pattern of primary accumulation led to industrial development is false. Primary accumulation led to the creation of a class of “free” labourers, period. What led to the industrial revolution and the rapid growth in the demand for labour and the strengthening of capitalism and thereby the absorption of surplus labour, was the rapid pace of capital accumulation and technical progress. Thus, distinguishing between the “classical” pattern of primary accumulation in Europe and the present pattern of primary accumulation in India does not seem be analytically useful.
Second:
PC’s whole analysis seems to be curiously oblivious of the neoliberal turn in the global economy, a fact that is amply reflected in policy changes in India too; we feel this is one of the biggest lacunae in PC’s analytical framework. The fact that radical scholars and activists have spent so much time and effort studying neoliberalism, understanding its genesis, structure and functioning must surely be known to a scholar of the stature of PC; the fact that he has ignored this vast scholarship, experience and political practice and has instead advanced the thesis of ameliorative state intervention is very significant and points towards a deep problem in his theoretical framework. After all, one of the defining characteristics of the State under neoliberalism is its gradual retreat from the provision of public goods and social services, especially those services that might benefit the poor and dispossessed. In the face of this well-known and well-documented fact, when PC asserts that the State has stepped in to do exactly the opposite, i.e., reverse the deleterious consequences of primary accumulation, one is more than surprised, one is appalled. Let us present some empirical evidence to dispel the illusion, if any, of the lately humane State, responsive to the needs of the poor, bowing before the pressure of the international discourse on poverty alleviation.
a. Distribution of subsidised food through ration shops is an old institution – not a device to make the pain of the poor bearable in the era of neoliberalism. During the last couple of decades, the decades of neoliberalism, the universal public distribution system (PDS) has been systematically dismantled; that is the hallmark of post-liberalisation India, not the strengthening of the PDS and increasing its reach. Priority sector lending, another device built by the Nehruvian state to help farming and related activities, is in a sorry state. In the last fifteen year 4,750 rural bank branches have been closed down: at the rate of one rural bank branch each day. During the year 2006 one branch was shutting down every six hours! [7]
b. The tale of microcredit institutions, an example of what PC considers the States intervention to reverse the effects of primitive accumulation, doing the job of offering palliatives has been questioned by many. The interest rates charged by micro credit institutions are often almost usurious. The motivation to harvest the middle ground between low interest rates of public sector banks (which are vanishing) and the exorbitantly high ones of village mahajans seems to be behind the coming together of corporate banks and NGOs in the micro credit venture. This serves two purposes. One, banks earn as much as 25% return, much higher than the organised sector return,[8] with an excellent repayment rate; a lucrative arbitrage channel thus opens up. Two, this credit model is then peddled as people-oriented, and opposed to a bureaucratic public sector model. This is then used to justify withdrawal of the state from its basic responsibilities towards socially and economically vulnerable sections of the population. That someone as perceptive as PC has fallen for the micro credit argument signals that the powers that be have been largely successful.
c. Contrary to the claim of the article, “social sector expenditure” has nosedived over the past few years. In 1996, rural development expenditure as a proportion of net domestic product was 2.6%. During the pre-liberalisation seventh plan (1985 to 1989) the figure was much higher at 4% [9]. From the mid 1980s to 2000-01 public development expenditure as a percentage of the GDP fell from 16% to 6%. The effects have of course been disastrous, especially in the farming sector where strong crowding-in effects of public investment is a well known fact. The growth rate of all crops fell from 3.8% in the 1980s to 1.8% in the 1990s, while total agricultural investment expenditure as percentage of the GDP fell from 1.6% to 1.3% [10]. Using a constant calorie norm of 2200 calorie per day, head count poverty ratio has risen from 56.4% to 69.5% between 1973-74 and 2004-05.
d. Guaranteed public work for the rural poor was attempted to be scuttled from the very top, i.e., by the officials of the State at the very highest levels. Social democratic proclivities of official communist parties, rather than the tactical calculations of the bourgeoisie, saw it through to some extent. To this day the corporate media loses no opportunity in tarnishing the National Rural Employment Guarantee Act [10] as useless, wasteful and distortionary.
In short, any substantial evidence of the State taking steps to make primitive accumulation bearable, to reverse its effects by providing alternative means of livelihood to the dispossessed population, seems to be totally missing. PC seems to be oblivious of the fact that the phase of neoliberalism is characterised precisely by the opposite: withdrawal of the state from the economy and social sectors, not its intervention in favour of the dispossessed.
Third:
The analytical handle of political society did not seem to have served any great purpose. What was meant by this term was essentially what has been called the unorganised sector, the sector of the economy comprising of petty agricultural producers, tenants, village artisans, street vendors, small scale manufacturers, etc. Admittedly they are less equal than the rest but that is a derivative of their economic position in the country rather than being a defining feature of its own. Since this “unorganized” sector employs nearly 92% of the Indian work force, a close scrutiny of its structure and dynamics is long overdue. But did coining a new term serve any goal? Not one that we can see. In the bargain PC, of course, seems to have missed two crucial points.
a. Labour has gone out of the discourse and PC’s analysis seems to endorse this trend. Recall that PC uses the term “non-corporate capital” for an economic representation of political society. Reading PC’s descriptions of it, one cannot help suggesting that “labour” rather than “capital” should have been emphasized. After all nearly 40% of the agrarian population are landless labourers [12]; of the landowners, about 86% come under the category of small and marginal farmers, and they supplement income from land with labour income. Simple back-of-the-envelope calculations tell us that at least 55% of the country’s population could be counted within political society – this is the contribution of agricultural sector alone. To get an idea of the size of political society one needs to add the fast increasing chunk of casual labourers in manufacturing and services, petty manufacturers, and self-employed groups of the service sector. Their income source, as we have noted, owes more to labour than to capital. Hence the term “non-corporate capital” seems inappropriate, both as a matter of description and analysis.
In this context one needs to understand what PC mentions about the resistance to forcible acquisition of land. When land was being taken away, some of the villagers did not participate in agitations while some of them resisted fiercely. But PC forgets to examine who did what. Closer examination of these struggles reveal that peasants with little or no land at all – sharecroppers, farm labourers – were the ones who fought on [13], [14]. This perhaps illustrates that using a class-neutral term may not be very illuminating for socio-political analysis.
b. While describing maneuvers of political society in negotiations with the neoliberal state PC uses illustrations of urban labour: squatters, hawkers, etc. This leads him to conclude that demands of political society mostly fall outside the domain of the legally permitted. But what about demands such as payment of minimum wage, subsidised inputs and credit, support price for crops, right to livelihood, right over resources like forest produce, water? Surely these demands, on which political society has plenty of stakes, are entirely legal. One suspects that the urban bias in PC’s analysis and illustrations has pushed the article to dubious conclusions.
Conclusion:
As landholdings have undergone fragmentation and aspirations for urban comforts have soared, agriculture has ceased to be the site of intense class conflict. For the foreseeable future the big question of political economy will be to understand how corporate capital, with hegemony over the state and civil society, negotiates with the clingers-on of a moribund peasant society. Aside from the shortcomings of PC’s analysis, which we have critically examined, resistance at Singur, Nandigram, Kalinganagar perhaps signals that all is not yet over with the agrarian question. Managing political society through governmentality is hardly an answer. Land remains a vital issue on which livelihoods, and therefore lives, are staked. There are no shortcuts – employments would have to be found for the evicted if corporate capital has to reproduce itself without hitch. Moreover, electoral compulsions of representative democracy need not be met through resource transfer as PC has suggested. In a polity where parties deliver anti-neoliberal rhetoric before elections and do precious little once in power [15], actual transfer of resources is neither necessary nor efficient.
Notes and references:
1. Partha Chatterjee (2008): “Democracy and Economic Transformation in India”, Economic and Political Weekly, Vol. 43 No. 16 April 19 – April 25.
2. PC also hypothesises that the rural poor do not face an exploiter in the village any longer; or that since taxes on land or produce are insignificant, the state is not an extracting agent of the peasantry. Both these claims are questionable, but we shall let them pass.
3. Kalyan Sanyal (2008) “Amader Gorib Oder Gorib” (Bengali), Anandabazar Patrika, May 20.
4. See http://radicalnotes.com/content/view/32/39/
5. Utsa Patnaik (1990) Agrarian Relations and Accumulation: The ‘Mode of Production’ Debate in India, (edited) Sameeksha Trust and Oxford University Press, Bombay.
6. Utsa Patnaik (1979) “Neo-populism and Marxism: The Chayanovian View of the Agrarian Question and its Fundamental Fallacy”, Journal of Peasant Studies, Vol. 6, No. 4, reprinted in The Long Transition, Tulika, New Delhi, 1999 provides a detailed criticism.
7. Sainath (2008) “4,750 rural bank branches closed down in 15 years”, The Hindu, March 28.
8. Mritiunjoy Mohanty (2006) “Microcredit, NGOs and poverty alleviation”, The Hindu, Nov 15.
9. Utsa Patnaik (2008) “Neoliberal Roots”, Frontline, Vol. 25, Issue 06, March 15-28.
10. Utsa Patnaik (2003) “Food Stocks and Hunger: The Causes of Agrarian Distress”, Social Scientist, Vol. 31, No. 7/8, 15-41.
11. Jean Drèze (2008) “Employment guarantee: beyond propaganda”, The Hindu, Jan 11, 2008.
12. There is ambiguity whether PC categorises landless labourers under political society or ‘marginal groups’. He mentions marginal groups are low caste or tribal people. By this count the landless are mostly marginal. But then he mentions marginals do not participate in agriculture; they are dependent of forest produce or pastoral activities. Going by the second stronger criterion we shall include the landless in political society.
13. Parthasarathi Banerjee (2006) “West Bengal: Land Acquisition and Peasant Resistance at Singur”, Economic and Political Weekly, Vol. 41, No. 46, November 18 – November 24.
14. Tanika Sarkar (2007) “Celebrate the Resistance”, Hardnews, April.
15. K C Suri (2004) “Democracy, Economic Reforms and Election Results in India”, Economic and Political Weekly, Vol. 39, No. 51, December 18 – December 24.
Courtesy:Sanhati
Posted by Deepankar Basu October 5, 2008 at 1:44 am in Economic Notes, Economy, West Bengal
Singur stands for many, often contradictory, things. It stands for the model of neoliberal industrialization that the Indian state is trying to push down the throats of its citizens at the behest of big capital. It stands for the unprincipled and populist politics of dormant right-wing forces. It stands for the abject surrender of an erstwhile communist party to the dictates of capital, the full flowering of a tendency that surfaced in the Indian political firmament circa 1967. But Singur also stands for the struggle of labour against capital, decidedly in confused and masked manners, but a struggle that has the potential to galvanize resistance against neoliberalism. When the Tata Group, forced by the long-standing struggle of the small farmers and landless labourers in Singur, was reported to be planning a move to Pantnagar in Uttarakhand, there were simultaneous reports of a possible Singur waiting for them in Pantnagar. A Singur in Pantnagar! That is the real significance of the struggle of the landless labourers and peasants of Singur.
Right from day one, the West Bengal government and the mainstream media has been building up the case for the manufacturing plant in Singur on the basis of half-truths and untruths. For a long time, the West Bengal government continued denying the fact that it had “acquired” a large tract of the proposed 1000 acres from unwilling farmers by using coercion, strong-arm tactics and certainly without their consent. Towards the later part of 2006, after considerable protests and a public hearing organized by intellectuals and activists, it had to finally accept its own earlier statements as false. Now it is known by all and sundry that 411.11 acres of the total 997.1 acres has been acquired without consent of the relevant farmers. For a long time, again, the West Bengal government continued denying the fact that most of the land that was sought to be “acquired” was fertile and multi-cropped agricultural land. It was only when earlier this year the Supreme Court pointed towards a possible violation of the Land Acquisition Act, responding to a petition filed for immediate halt of the Nano car project, that the West Bengal government finally accepted that it had been willfully misleading the public in this regard for so long; the SC had pointed out that acquiring and using fertile, multi-crop agricultural land for industrial purposes goes against even the Land Acquisition Act, which the West Bengal government was, paradoxically, trying to use to “acquire” that land. Now it has been established beyond any shadow of doubt that the land on which the proposed plant is to come up is, in the main, fertile, multi-cropped agricultural land. Another myth that had been in circulation for some time was the following: the land in Singur could not be used for agricultural purposes for most parts of the year because of water logging. This claim has also been contested and shown to be untrue. Now it is accepted by all serious commentators that the land had, before being fenced off by the West Bengal police, been in constant use throughout the year for growing various agricultural crops, and that it provided livelihood for more than 12,000 families. Even though these and other such claims of the West Bengal government and the mainstream media have been refuted point by point, over and over again, with facts and arguments and lot of patience and care, they keep turning up ever and ever again like bad coins. They will, as long as the social forces whose interest they represent continue their efforts to hegemonize society; and we will continue refuting them point by point, with patience and care and logic and facts.
But even when these particular canards are discounted, there seems to be a larger argument for industrialization that Singur purportedly represents. The West Bengal government and large sections of the mainstream media tend to equate Singur with industrialization and portray any and every opposition to Singur as opposition to industrialization. The apparent strength, or shall we say charm, of this argument becomes obvious when we see even an preeminent thinker like Amartya Sen falling for it. But this argument is deeply flawed. Opposition to Singur is not opposition to industrialization, it is opposition to neoliberal capitalist industrialization. Opposition to Singur is opposition to the conflation of industrialization with neoliberalism, a scenario where the State steps up its efforts to subsidize capital and shore up its profits while capital externalizes its costs onto labour and the environment with impunity. It is this model of industrialization that we oppose.
An alternative model of industrialization, as far as we can see, would operate in an exactly opposite fashion. It would tax capital and not subsidize it, prevent capital from externalizing its costs onto labour and the environment rather than facilitating it, intervene in decisions related to the choice of technique to be used in production, force private capital to do proper cost-benefit analysis before embarking on a (socially) costly industrial project, intervene through fiscal and monetary policy to maintain overall levels of aggregate demand and try to ensure full employment with living wages for workers. In the alternative vision, the State would use tax revenues to build infrastructure, provide social sector services and closely monitor and improve the well-being of the people. Singur, and the model of industrialization that it stands, takes us in the exact opposite direction; that is why it needs to be opposed. It destroys livelihoods tied to agriculture without creating compensating jobs in industry, it willfully snatches away fertile, multi-crop agricultural land for industrial purposes when so much fallow (and other unused and misused) land is there to be used, it externalizes the costs of production on the most vulnerable sections of the population and the environment, and all this while the State steps in to massively subsidize private capital even further. If, therefore, due to the struggle of the project affected people the Tata’s finally leave West Bengal, it should call for rejoicing not for middle-class chest-beating that is so much on display these days. For it would be one of the important victories in the emerging struggle against neoliberalism in India.
Cost and Benefits
In this article we will try to study details of the costs and benefits of the proposed manufacturing plant in Singur on the basis of information that is available in the public domain. But a caveat is necessary. This is not a full blown cost-benefit analysis because we shall not venture to quantify the indirect benefits of possible net employment generation and the income that might arise from there. At this point, it is not even clear whether there will be positive net employment generation; it is not at all obvious, in other words, that the employment destruction entailed by the project will be exceeded by the employment generated by it. Moreover, a full cost-benefit analysis would require much more information than has presently been made available by the West bengal government; on the basis of the available information, which pertains mostly to the benfits that the West Bengal government plans to make available to the Tata’s, we shall mainly try to approximately quantify the costs to the exchequer, and ultimately to the people of the state.
A careful study of the details relating to the proposed project in Singur, to the extent possible by the publicly available information, is important for two main reasons. First, it is important to do a dispassionate analysis of the costs and benefits of this project; since the West Bengal government has been continually making largely unsubstantiated claims about the putative benefits of this project, it is high time we carefully analyzed the foundations of this claim. Second, this project is very much in line with the current trend of neoliberal capitalist industrialization in India anchored tightly in the visions of the Special Economic Zones (SEZs); hence a study of this project will highlight, and help us evaluate, many of the important characteristics of neoliberal capitalist industrialization that has been envisioned and aggressively pushed by the Indian state since the early 1990s. Parenthetically, one should also note how acceptance of the logic this project signals the gradual dissolving of social democracy in India: from”managing” the conflict between labour and capital, social democrats are increasingly moving towards “managing” labour for capital.
The main document that we will use for the purposes of this study is the text of the recent “agreement” signed between the Government of West Bengal, the West Bengal Industrial Development Corporation (WBIDC) and the Tata Motor Ltd. (TML) pertaining to the proposed manufacturing plant in Singur. By a careful analysis of the information contained in this document, and complementing this with some more information from other sources we will, hopefully, be able to arrive at a true picture of the costs and benefits of this project. But before we get into the nitty-gritty of the agreement, let us remind ourselves about the severe difficulties that we have faced over the past few years in just trying to get hold of the information that is relevant to this project. Recall that the details of the “deal” wasn’t made public initially because the West Bengal government believed it was a “trade secret”. Once this argument was properly trashed, the government shifted gears. During this period, it wasn’t made public despite repeated Right To Information (RTI) applications because, according to the government, the Tatas didn’t want it to be made public! Finally what has been made public, mainly because of pressure from the standing committee on industry of the West Bengal state assembly, are only parts of the “deal”; this all we have for the purposes of study and analysis. The TML filed a case in the Calcutta High Court and got a stay against the rest of it being made public. What is there in the rest of it? We, and the more than 12000 project affected families in Singur, can only guess. The entire episode, to say the least, is patently undemocratic, and makes a mockery of the intent of the recently passed Right to Information Act. One does not, of course, discern even an iota of concern about this important matter displayed by the “peoples’ government” in West Bengal!
The Agreement
The “agreement” between the West Bengal government, WBIDC and TML is a remarkable document by all means. Starting from the premise that the state of West Bengal must match, rupee for rupee, every fiscal and financial incentive offered to TML by other states like Uttarakhand and Himachal Pradesh, it goes on to lay out the details of the same. This, the agreement states, should be read as the state government’s eagerness to “take appropriate steps for rapid industrialization in West Bengal”. This, to the best of our knowledge, is the clearest admission by the West Bengal government and the “communist” party standing behind it of the acceptance of neoliberalism. By accepting that the road to “rapid industrialization” winds its way through huge subsidization of private capital in the form of tax breaks and soft loans with the concomitant costs borne by labour and the environment, the West Bengal government has finally announced its participation in the Indian State’s neoliberal industrialization program. We will discuss this issue in greater detail below.
The text of the agreement is also remarkable in its enormous onesidedness. Every concrete detail in the agreement refers to what the West Bengal government will do for TML; there is no mention of what TML will do in return! It is as if by accepting to invest in the state, TML has bestowed an enormous favour on the people and its government. Overwhelmed by this boundless magnanimity of TML, the West Bengal government has decided to offer everything in its power to return that favour. The favours offered to TML come in four concrete forms: (a) subsidized land for setting up the manufacturing plant, (b) loans in the form of tax holidays, (c) soft loans to get started, and (d) subsidized electricity. There is no mention of anything that the state can expect in return from TML. Loans do not require collateral, failure to make timely payments do not require penalties, there is no mention of what employment generation TML’s investment will entail, there is no mention, in short, of anything at all that might inconvenience private capital or hold it accountable to the people. Below, we will look at the each of the components of the favours, what we will quite realistically refer to as costs, and also try to take seriously the claims of the government about the purported benefits of the project, but first, let us briefly remind ourselves about the land “acquisition” and its proposed use.
Land “Acquisition” and Use
The agreement – scroll down to read the text of the agreement – states that land “of approximately 1000 acres chosen [by TML] in P.S. Singur of District Hoogly” was finalized as the site for the construction of the proposed plant. Subsequently WBIDC “commenced the process of acquisition of this land”, an euphemism for the veritable terror unleashed on the farmers of Singur to give up their fertile, multi-cropped agricultural land for neoliberal industrial “development”. Using the colonial era Land Acquisition Act of 1894, the WBIDC coerced – with the support of the police and cadres of the ruling party, CPI(M) – several hundred families to give up their land, and according to the agreement, it is now “in possession of 997.1 acres of land”.
Out of this forcibly-acquired 997.1 acres of land, 647.5 acres will be leased to TML to set up its proposed plant, what the agreement calls the “Automobile Project”; another 290 acres will be leased to “the vendors to this Automobile Project approved by TML”, the vendors being the ancillary and component manufacturing units. An area of 14.33 acres will be given to the West Bengal State Electricity Board (WBSEB) for the construction of a 220/132/33 KV substation to provide and uninterrupted supply of subsidized electric power to the “Automobile Project”; and the remaining “47.11 acres will be used by WBIDC for rehabilitation activities for the needy families amongst the Project affected persons”. Note in passing that only 4.74% of the “acquired” land has been earmarked for purposes of rehabilitation of the project affected persons.
Total Cost of the Project
According to the details available in the agreement, the total cost to the people of West Bengal of the proposed project in Singur, as we have already pointed out, can be broken down into the following four categories: (a) subsidized land for setting up the manufacturing plant, (b) loans in the form of tax holidays, (c) soft loans to get started, and (d) subsidized electricity. Point 7 of the agreement provides details about each of these. Point 7(a) is about the tax holiday; point 7(b) is about the hidden subsidy in land; point 7(c) is about the soft loan, and point 7(d) is about the subsidized electricity. The sum of these “fiscal incentives”, excluding the subsidy in electricity, add up to what the Uttarakhand/Himachal Pradesh governments offered to TML. How do we know this? From point 7(a) of the agreement which states: “This benefit [i.e., the tax holiday] will continue till the balance amount of the Uttarakhand benefit (after deducting the amount as stated in para 7b and 7c below) is reached on net present value basis, after which it shall be discontinued.” In other words, the sum of the benefits offered by the West Bengal government in the form of (a) subsidized land, (b) tax holiday, and (c) soft loan will equal what the Uttarakhand/Himachal Pradesh governments were willing to offer; the subsidized electricity (and other real estate, as we will see below) are bonuses, which make the West Bengal government’s offer exceed the Uttarakhand/Himachal Pradesh. But this also means that we can indirectly arrive at the total cost of the project in Singur if we can somehow figure out the amount of the Uttarakhand/Himachal Pradesh package.
Point (1) of the agreement mentions that the “incentive package in Uttarakhand/Himachal Pradesh consists of:-
(a) 100% exemption from Excise Duty for 10 years.
(b) 100% exemption from Corporate Income Tax for first 5 years and 30% exemption from Corporate Income Tax for next 5 years.”
How much is this package worth? Let us try to think this through. We have collected some information from annual financial reports of TML in Table 1 that will help us get an approximate figure for the Uttarakhand/Himachal Pradesh package using points 1(a) and 1(b).
There are some remarkably stable patterns in the data. TML seems to be paying about 12% of its gross revenue as excise duty and 2.35% of its revenue as corporate income tax. If TML were to set up shop in Uttarakhand or Himachal Pradesh, it would be manufacturing about 250,000 small cars per annum. If each car were to sell for Rs. 1 lakh, TML’s gross annual revenue would be approximately Rs. 2500 crores. If the TML would have to pay excise duty, assuming the above ratios, it would pay about 300 crores (12% of Rs. 2500 crores) per annum; if it had to pay corporate income tax, it would have to pay about Rs. 58.75 (3.5% of Rs. 2500 crores) crores per annum. If TML set up shop in Uttarakhand/Himachal Pradesh, according to the agreement, it would not have to pay these taxes as stated in point 1(a) and 1(b).
Summary of the Uttarakhand/Himachal Pradesh package: for the first 5 years, TML gets Rs. 358.75 crores every year (100% excise duty exemption + 100% corporate income tax exemption); and for the next 5 years, it gets Rs. 317.63 crores every year (100% excise duty exemption + 30% corporate income tax exemption). The NPV of this benefit package is Rs. 2062.79 crores (using 11% for calculating NPV).
According to point 7(a) of the agreement, the West Bengal government’s “benefits package” will equal this sum if we compute the benefit coming from subsidized land, soft loans and tax holidays. Let us now look at the different components of the package promised by the West Bengal government.
Hidden Land Subsidy
What are the terms of the rental structure on the land lease agreed upon by WBIDC and TML? Two different set of rules apply, one to the 647.5 acres leased to TML and another to the 290 acres that will be leased to the vendors approved by TML. Both leases, however, will come up for possible renewal 90 years down the line. For the 647.5 acres of land that is leased to TML, the annual rental will be Rs. 1 crore for the first five years, increasing by 25% every five years till 30 years. Thereafter, the annual rental will be fixed at Rs. 5 crore, to be increased by 30% every 10 years till the year 60; the rental from year 61 to 90 will be Rs. 20 crore per year. For th vendors, the rental structure is simpler: for the first 45 years, they will pay an annual rental of Rs. 8000 per acre, and for the next 45 years will pay an annual rental of Rs. 16000 per acre. Since the vendors are leasing 290 acres of land, this means that for the first 45 years, they pay a total of Rs. 0.232 crores per year and Rs. 0.464 crores per year for the rest of the time.
Details of the payment schedule, for both TML and the vendors, is summarized in Table 2. This is similar to, but more detailed than, a table used by Madhukar Shukla for commenting on the Nano project; the main difference is the inclusion of figures on net present values (NPV). What is net present value? It is a conceptual device used to compare sums of money at different points in time, which I explain in greater detail below. Why is NPV relevant here? Because an investment project like the proposed plant in Singur involve costs and benefits flowing in at different points in time. Columns (2) through (6) give the actual payments to be made at various points in time, while the last three columns give the net present value (NPV) of the payments, where NPV has been calculated using an interest rate of 11% per annum (exactly as done by the WBIDC in Annexure II of the agreement). Note in passing that the Annexure where all the computations relating to the project has supposedly bee done has not been made available to the public; all we know is that the NPV calculations used an interest rate of 11%.
To arrive at figures about the costs of “acquiring” the land and the revenue earned from leasing it to TML (and the vendors), we need to remind ourselves that the WBIDC spent anything between Rs. 150 crore and Rs. 200 crore to “acquire” the land from the unwilling farmers. How much will WBIDC get for letting TML use that piece of land? Columns (4) shows that the TML will pay a total amount of Rs. 855.79 crores over 90 years as rental fees for using the land. So the cost incurred by the WBIDC is Rs. 150-200 crore, while revenues will be 855.79 crore. Does this mean that the WBIDC made a good bargain with the TML on behalf of the people of the state? Does it men that the WBIDC is actually making a “profit” in leasing out the land to TML? Let us think about this a little more.
A rupee today is not equivalent to a rupee next year. Why? One can put the rupee that one has today in the bank and earn an interest income at the going interest rate to augment the original sum. If the current interest rate is 11%, then one would have Rs. 1.11 at the end of the year if the rupee were to be invested in an interest-bearing asset today. Put another way, Rs. 1.11 at the beginning of next year is equivalent to Rs. 1 today (at the beginning of this year). Let us go further, and suppose that we let our rupee lie in the bank for two years. How much do we have at the beginning of the third year? Rs. 1.21 (because at the beginning of the second year one has Rs 1.11, and then one earns 11% on that amount to arrive at Rs. 1.21 at the beginning of the third year). Inverting things, we see that Rs. 1.21 two years hence is equivalent to Rs 1 today when the market interest rate is 11%. This logic can be extended to any number of years and is the basis of computing net present values (NPVs). In the jargon of economics, if the market interest rate is 11%, Rs. 1.1 one year hence has a NPV of Rs. 1; and Rs. 1.21 two years hence has a NPV of Rs. 1. Thus, NPV is a device to make sums of money at different points in time comparable to each other. What does this mean for us?
It means that we cannot just add up all the rental payments that TML is supposed to make over the next 90 years (which is Rs. 855.79 crores) and compare it to the cost incurred by the WBIDC to “acquire” the land today (which is Rs. 150-200 crores). To make the stream of rental payments of the TML (over the next 90 years) comparable to the cost of “acquisition” today, we need to calculate the NPV of the rental payment stream. That is precisely what we have done in column (7) in Table 2. Column (8) gives the sum of the NPVs of the rental payments. On the basis of this calculation we arrive at a very striking fact at the end of column (8). The NPV of the rental payments that the TML will make over the next 90 years is Rs. 14.4 crores! The NPV of the rental payments that the vendors will make is Rs. 2.13 crores.
Summary: while the cost to the WBIDC for “acquiring” the land was anything between Rs. 150 crores to Rs. 200 crores, the NPV of the revenue from rental income that will accrue to the WBIDC is Rs. 16.53 crores, sagging the WBIDC with a loss of anything between Rs. 130 crores to Rs. 180 crores! Which is just another way of saying that taxpayers are subsidizing a big corporate entity like the TML to the tune of Rs. 150 crore just in terms of the land that the WBIDC “acquired” for it.
Cost of Circumventing the Law
A moment’s reflection on the time structure of rental payments for TML brings another characteristic of the transaction to the fore. The time structure of payments has been arranged in such a way that the bulk of the rental payments come in later years. From column (6) in Table 2 we see that the TML makes only 5% of its total payments in the first 25 years of the lease; in the first 50 years, it pays only 20 percent of its total payment commitments. The Comptroller and Auditor General of India (CAG) had pointed out in March 2008 that, according to Government of India laws, long-term leases of 99 years required that the lessee pay 95% of the market value of the land as a one-time premium at the beginning of the lease and pay annual rent at the rate of 0.3% of the market value of the land. The same report went on to note that the agreement between the TML and the WBIDC should have entailed an immediate payment of Rs. 91.88 crore and subsequent annual rents of Rs. 29 lakhs for the next 90 years. As opposed to this, the TML, according to the agreement, would pay nothing upfront and would only pay Rs.1 crore at the end of the first year!
Of course it would have been illegal if the lease was for 99 years. Hence, it seems, the WBIDC cleverly decreased the span of the lease by 9 years to circumvent the letter of the law. In spirit, though, this still amounts to a violation of the law. Why? Because the law states that for long-term leases the majority of the payments should be paid upfront by the lessee; and the WBIDC agreement with TML shows an exactly opposite time structure of payments, with most of the payments pushed off far into the future. Thus, even though in letter the agreement clears legal hurdles, it is obvious that it fails miserably in terms of the idea behind the law. No wonder the CAG faulted the WBIDC on several counts regarding its agreement with the TML. But let us pause for a moment and think why the CAG (or the laws) wanted the bulk of the payment upfront.
There are two basic reasons why the law might want to ensure bulk of the payments for a long-term lease upfront. One, large upfront payments for long-term leases increases the NPV of the rental payment stream. Since these long-term leases generally require the government to hand over public land for private use, it makes sense to structure rental payments in such a way that the government exchequer gets a good value in return; that is why a large upfront payment is usually written into lease contracts for long-term leases. The second reason for having a large upfront payment relates to considerations of risk. When a stream of payments has relatively large amounts pushed far away in the future, the NPV of that stream of payments is more liable to change when market interest rates change.
Let us take an example to understand both these points. Suppose, for simplicity, we want to compare two payment streams, A and B. A has Rs. 1 lakh today and Rs 9 lakhs in 10 years; B has Rs 9 lakhs today and Rs .1 lakh in 10 years; note that both entail a total payment of Rs. 10 lakhs over a period of 10 years and are similar in this respect. But they also are very dissimilar. To understand why suppose that the market interest is 10% at the moment. NPV of A is Rs. 4.47 lakhs, while the NPV of B is Rs. 9.39 lakhs. Thus, the NPV of B is much higher than that of B, which clarifies the first point. Now suppose that the market interest rate increase to 15%; this will obviously diminish the NPV of both A and B. But which will fall more? A’s NPV falls by about 39% while B’s NPV falls by only 1.5%! Thus, the risk of loss of revenue that comes from a payment stream (payment of rent for instance) is higher when most of the payments come in during relatively later periods. It is probably because of these two sound economic reasons, among others, that the CAG urged the West Bengal government to reconsider its lease agreement with the TML. By structuring the rental payments such that most of it come in during later years, the West Bengal government is not only losing revenue but is also bearing a higher risk of loss of even that minimal revenue.
So, how much is the WBIDC losing in real terms by using the rental payment structure that is summarized in Table 2 instead of the one recommended by the CAG? If TML were to pay Rs. 91.88 crores upfront and then subsequently pay a rental of Rs. 29 lakhs per annum for the next 90 years (as suggested by the CAG ), the NPV of this payment scheme would be Rs. 94.52 crores (using an interest rate of 11% per annum for calculating the NPV). The NPV of the currently agreed upon rental payment scheme (as per the agreement) is Rs. 16.53 crores (sum of entries in column (7) of table 2). Hence, the WBIDC is losing Rs. 77.99 crores due to the chosen rental payment structure.
Summary: the total financial loss to the WBIDC due to the agreed upon rental payment structure, as opposed the one suggested by the CAG, is Rs. 77.99 crores; the WBIDC, in addition, has to bear extra risk arising from possible fluctuations in the market interest rate.
Soft Loans and Tax Holidays
Point 7(c) of the agreement provides information about the soft loan: “The West Bengal Govt. will provide TML a loan of 200 crores @ 1% interest per year repayable in 5 equal annual installments starting from the 21st year from the date of the disbursement of the loan”. This loan, moreover, “will be disbursed within 60 days of this agreement”. Point 7(a) of the agreement refers to the loans that the WBIDC will give to the TML in the form of tax holidays. The tax holiday will continue, as we have already noted, till the sum of the land subsidy, tax holiday and the soft loan equals the Uttarakhand/Himachal Pradesh package.
So, what is the total loss to the exchequer due to the tax holidays and soft loans. There are two ways to arrive at approximate value of this loss. First, if we knew the exact amounts of the loans (in the form of tax holidays) and the exact repayment shedule and interest rates, we could calculate the net present value of the loss. But unfortunately, we do not have enough data in this regard, and so we will adopt an indirect method to arrive at the notional cost of the tax holiday and the soft loans. This second, indirect method, begins by recalling that, according to point 7(a) of the agreement, the total benefits from the land subsidy, taxt holidays and soft loans offered by the West Bengal government will equal the benefits that was offered by the Uttarakhand/Himachal Pradesh govenrment. We have seen above that the total value of the Uttarakhand/Himachal Pradesh package was approximately Rs. 2063 crores on a net present value basis. We have also seen that the cost to the exchequer of the subsidized land was about Rs. 228 crores (Rs. 150 crores for direct subsidy and Rs. 78 crores lost due to the time structure of the rental payment scheme). Thus, the total cost of the tax holiday and the soft loans will be Rs. 1835 crores (which is Rs. 2063 crores less Rs. 228 crores) on a net present value basis. Note that this is a notional cost.
The last part of 7(a) seems even better. It says: “WBIDC will ensure that the loan under this head is paid within 60 days of the close of the previous year (on 31st March) failing which WBIDC will be liable to compensate TML for the financial inconvenience caused @ 1.5 times the bank rate prevailing at the time on the amount due for the period of such delay”. What does this mean? It means that if the WBIDC is not able to make the loan to TML within 60 days of the close of the financial year, it will penalize itself by compensating TML at 1.5 times the prevailing bank rate. So, if the prevailing bank rate is 10%, which is close to what is the case right now, the WBIDC will penalize itself for any delay on its part by paying back the TML for the “financial inconvenience” at 15%.
Summary: the cost of the soft loans and tax holidays to the TML by the West Bengal government will be about Rs. 1835 crores on a net present value basis.
More Gifts from Santa: Real Estate and Subsidized Electricity
Industrial development requires infrastructural support from the government, as we all know. And so the West Bengal government displayed its commitment to “rapid industrialization” by offering a “virtual gift of 650 acres of prime land to Tata Housing Development Company (THDC) in Rajarhat New Town and in the adjoining Bhangar Rajarhat Area Development Authority for building an IT and residential township along with WBIDC as a partner“. What better way to provide “infrastructural assistance” for the industrialization effort that to hand over prime land for real estate speculation! Some reports suggest that this “gift” to TML will cost the exchequer about Rs. 160 crores.
The West Bengal government has also promised to supply electricity at Rs 3 per kilo watt hour (kwh), which is around half the price charged to high-tension industrial consumers in the West Bengal at the moment. It has also promised to absorb any increases in electricity costs to the TML in Singur. Point 7(d) of the agreement states: “In case of more than Rs. 0.25 per KWH increase in tariff in every block of five years, the Government will provide relief through additional compensation to neutralize such additional increase”. This will mean, at the least, shelling out Rs. 70 crores annually for subsidizing the electricity requirements of the whole project at Singur. The NPV of this subsidy for the 90 year period of the lease would be Rs. 706 crores.
Summary: the cost to the exchequer of the real estate gift and subsidized electricity will be about Rs. 865 crores.
Adding up the Costs
Let us now take a moment to put all this together. The subsidy that TML gets, according to the terms of the agreement, on the land in Singur is anywhere between Rs. 100 and Rs. 150 crore; the subsidy due to the rental payment structure is Rs. 78 crores; the implicit subsidy due to the tax holiday and the soft loan would be about Rs. 1835 crores; the real estate “gift”, also known in WBIDC terminology as “infrastructural assistance”, is worth Rs. 160 crores; and the subsidized electricity will cost another Rs. 706 crores. So, the Tata conglomerate, one of the largest corporate entities in the country, is awarded a “gift” of about Rs. 2928 crore by a “communist” government so that it can be induced to set up a car manufacturing plant in the state and lead it on to the path of neoliberal industrial development. To put this figure in perspective, let us refer to the 2008-09 budget speech of the Finance Minster of West Bengal. Pointing to the emergence of what he called the “industrial potential” of the state, he offered some concrete figures to bolster his argument. In 2005, the annual realized (industrial) investment in West Bengal was Rs. 2515.58 crores, which then jumped up to Rs. 5072.26 crores within the next two years. Thus, a sum close to 58 percent of the total realized industrial investment in the state in 2007 would be the cost borne by the people of the state if the Tata-Singur project too off.
Summary: the total cost of the Tata-Singur project incurred by the exchequer, and hence ultimately the tax payers, will be approximately be Rs. 3000 crores on a net present value basis when we add up the costs pertaining to the land subsidy, the tax holidays, the soft loan, the real estate gift and the subsidized electricity using an interest rate of 11%. This is about 58% of the total realized industrial investment in the state of West Bengal in 2007.
What are the Benefits?
What are the purported benefits of the Tata-Singur project? The West Bengal government has advanced two claims regarding the benefits: employment generation and improvement in the investment climate of the state. These two claims about possible employment generation and future investments need to be looked at closely, because the rationale offered by the West Bengal government for giving the stupendous bonanza to the Tatas rests precisely on these. Both these claims are dubious. Regarding the claims about employment generation, there have been figures ranging from a high of 12000 (2000 in the Nano plant proper, 10000 in ancillary and complementary units) to a low of 750 (some recent local newspapers have put the figure at 650). The upshot of all this is that there is no certainty about the employment generated. However, if we look at a recent BBC report on this matter it becomes clear that 62% of the projected employment in the automotive sector is going to be skilled labour, 28% is going to be management jobs, leaving only 10% jobs for unskilled labour. Now, the displaced population in Singur, if at all they get absorbed in the mother plant or in the ancillary units, would typically be offered employment as unskilled labour. So, the prospect of much employment being generated, especially for the people in Singur, is dim. Moreover, all these calculations ignore the employment destruction that the project will inevitably entail. If we were to properly take both possible employment generation and possible emplyment destruction into account, we could arrive at a figure for the net emplyment generated by the project. At the moment, it is not even clear that the net employment figure will be positive.
The other claim about the Singur project generating prospective investment in the future rests on equally shaky foundations. The question really boils down to whether the Tata plant can attract other major investments and lead to an industrial rejuvenation of Bengal. The example of Jamshedpur in neighbouring Jharkhand should be carefully looked at. Tata’s factories in Jamshedpur did nothing for the overall industrialization of the state of Bihar or now Jharkhand. It remained an enclave of industrial activity, without forging strong forward or backward linkages in neighbouring areas. The other issue to think about, in the context of the claim about TML drawing future investments, is whether other industrialists coming to invest in Bengal would also demand similar bonanzas from the government. Will the government refuse them the goodies that they have offered TML and let them turn away or will it repeat the Tata-like agreements and put further burdens on the exchequer. Either option does not seem to be beneficial from the perspective of the working people of the state.
Summary: while the costs of the proposed Singur-Tata project is obvious, tangible, immediate and large, the benefits seem to be uncertain, residing far away in the future and their magnitudes small.
Oh! So Poor Tata
A few months back, the finance minister of West Bengal presented a budget with a Rs. 2 crore deficit; a net subsidy of about Rs. 3000 crores would certainly be extremely costly for the people of the state; after all it is about 1500 times the budget deficit in fiscal year 2008-09. Given that a small, poor, fund-starved state like West Bengal is making such great efforts to subsidize the Tata’s, it must mean that they (the Tata’s) are in a dire financial situation. But is that true? If we merely cast a glance at the recent international buying spree that the Tata’s have been engaged in, we might be able to understand how far from the truth would be any assertion that the Tata’s require financial assistance from a poor state like West Bengal to start an industrial project.
The Tata Group of Companies, let us remind ourselves, is one of the largest business conglomerates in India with about 100 large companies in its fold. With the might of the Indian State firmly behind it, monopoly capital in India has started a move to aggressively acquire foreign assets, what it calls strategic corporate assets. In the last few years, the Tata Group has been leading this acquisition spree on behalf of Indian big capital, making forays not only in Asia and Africa but also in the heartland of world capitalism: USA and Europe. Let us briefly take a look at the record of the Tata Group with regard to foreign acquisitions.
In January 2007, the Tata Group pulled off India’s biggest ever takeover of a foreign company to buy Anglo-Dutch steel-maker Corus for $12 billion; this acquisition made the
combined entity (Tata-Corus) the world’s fifth largest producer of steel. In March 2004, the Tata Group acquired South Korea’s Daewoo Commercial Vehicle Company for $102 million; this was followed by the acquisition of a 21 percent stake in Spanish bus maker Hispano Carrocera for $18 million with an option to pick up the remaining stake at a later date. Around the same time, Tata Technologies, another company in the Tata fold, which provides automotive engineering and design services, bought Britain’s Incat International for $53 million.
Tata Consultancy Services, which was earlier a division of Tata Sons and a rising star in the Tata Group, has been among the most aggressive shoppers for foreign companies. It has acquired six companies in the past few, with the net value of the deals close to $100 million; these include FNS of Australia, which was acquired for $26 million and Chile’s outsourcing major Comicrom, which was bought for $23 million. When the Tat Group acquired the former state-run, international telecom carrier, VSNL, a few years ago, it was on its way to becoming a major telecom player in the global markets. To enhance its position, it acquired undersea cable company Tyco of the US for $130 million, Internet service provider Dishnet’s India division for $64.28 million and international telecom service provider Teleglobe of the US for $239 million.
Following its acquisition of Hindustan Lever Chemicals, Tata Chemicals was on the lookout for a steady supply of phosphoric acid for its newly acquired plant at Haldia, West Bengal. Accordingly, it took over two overseas companies for a total value of $215 million: Indo Maroc Phosphore of Morocco in March 2005 and Brunner Mond Group of Britain in December 2007. Morocco, by the way, produces over 50 percent of the world’s rock phosphate.
In 2000, Tata Tea bought British giant Tetley for a $407 million, and started looking for similar deals to strengthen its global position in the tea and related drinks business. This search led to acquisition of 33 percent stake in the South African company Joekels Tea Packers for an undisclosed amount and 30 percent stake in the US-based favoured water manufacturer Glaceau for $677 million, the acquisition of the US-based Good Earth Corp for $32 million and acquisition of the Czech Republic’s firm Jemca for an unknown amount.
India Hotels, the hotel branch of the Tata Group, acquired several hotels abroad for $121 million in the past few years. It is reported to have set aside $100 million for future acquisitions in Europe, the Middle East, Asia and the US. In December 2006, it had acquired W, a hotel at the Woolloomooloo Bay in Sydney; it was followed by the taking over of the management of The Pierre, a luxurious landmark hotel on New York’s Fifth Avenue. India Hotels, which runs the Taj Group of hotels, has 39 hotels in India and 18 worldwide. A recent acquisition of India Hotels was Campton Place Hotel in San Francisco.
If we add up the figures for the Tata Group’s overseas acquisitions, we arrive at a rough figure of $14,062 million, which converts to roughly Rs. 56,248 crore (using an exchange rate of Rs 40/$), and this is not even a complete list of Tata’s recent acquisitions. And, what does all this lead to? It inevitably leads us to the conclusion that a corporation which can invest more than Rs. 56,000 crores for acquisition of strategic foreign corporate assets requires the financial support of India’s impoverished taxpayers, to the tune of Rs. 1140 crores in real terms, to set up a small car manufacturing plant in India! That, in a nutshell, is what we would like to call neoliberal industrialization, pushing which down our throats has become the almost single-minded purpose of the West Bengal Government and the “communist party” that is at its helm of affairs.
TINA Logic
But even after all these facts and figures and arguments have been read, understood and absorbed, sympathizers of the West Bengal government will no doubt come up with a supposedly unbeatable argument: TINA. There is no alternative. This argument points to the magnanimous offers made by other states in India to attract private capital, and then goes on to plead the inability of the West Bengal government to follow any route other than to offer even more largesse. Recall that the text of the agreement starts precisely with this argument. It builds up its case for the huge hidden subsidies that is offered to TML, and which we have seen in great detail above and which add up to about Rs. 3000 crores on a net present value basis, by emphasizing the incentive package that the States of Uttarakhand and Himachal Pradesh has offered to the Tatas. That is why the West Bengal government must offer more than the value of the offers by the other states if it is to attract private capital, like the TML, to industrialize the state. Since, other states are offering huge tax breaks and soft loans, West Bengal must also do so, the argument goes. West Bengal cannot fight this trend, caught as it is in the competitive struggle between the states of India.
One must begin by acknowledging that there is some truth to this assertion. It is true, in other words, that in the neoliberal set-up private capital has managed to generate competition between political entities, both within nations and between nations, to ensure higher profits on its investments. But acknowledging this fact, the fact of the existence of this strong pressure for competition among states, does not mean accepting it as inevitable; it does not mean accepting the logic, championed by the proponents of neoliberalism, that there can be no alternative to the present framework. If the fight against neoliberalism has to be taken forward then this logic must be fought. One cannot succumb to this logic in practice and claim to be fighting against neoliberalism.
And to fight this logic, one must understand what it implies. The competition that capital manages to enforce on political entities (for instance states in India or countries in the global context), one must understand, is akin to a “race to the bottom”. As soon as one state lowers taxes, reduces social sector spending, loosens labour laws, cracks down on political dissent in order to make the atmosphere “conducive” for investments, another tries to outdo the first by reducing taxes even further, reducing social sector spendings even further, making labour even more “flexible” in order to “attract capital”. And thus, as the logic of this competition unfolds in all dimensions, people of all the states taken together lose. Lower tax revenues means lower resources for the State to invest in educations, health, nutrition, poverty alleviation; it means increased misery for the common people, with sub-optimal infrastructure and public amenities. And who benefits from this fierce competition? Capital. Thus accepting this as the only way to industrialize is to accept this “race to the bottom”, with all its deleterious consequences for the population, as the West Bengal government seems to have done.
So what can be done? One has to act on several fronts at the same time. First, it is undeniable that fighting the neoliberal logic will require concerted political action at the Central level to thwart moves to implement central-level neoliberal policies; the largest “communist” party standing behind the West Bengal government must shed its fears of radical mass political activism and launch, with other like minded political forces, a nationwide offensive against neoliberalism, instead of using all its energies in parliamentary antics. It will also mean not succumbing to the pressures of capital at the state level as the West Bengal government has pathetically done. If private capital wants to move out of the state because taxes are high and social sector spendings are growing and the labour laws are favourable for the workers, and the health and educational status of the people are improving, then so be it. The state need not hanker after such capital for, at the end of the day, massively state-subsidized investments of such capital is not beneficial for the people.
Second, one must understand that, if attracting capital is all one wants to achieve, capital can also be attracted in a very different fashion, by reversing the harmful, negative competition between states and instead initiating a “race to the top” to replace the “race to the bottom”. For it is a fact, recently noted by several observers of the Indian economy, that India is very rapidly moving into a regime marked by serious shortages of skilled labour. A state which wants to attract private capital can, therefore, invest massively in building up the education and health system for the workers; a healthy and skilled labour force can be a stronger incentive for capital to set up shop in a state than huge tax holidays. In fact, instead of giving tax breaks to capital, the state will need to tax them aggressively and use the tax revenue to further improve the conditions of the working people. Equally true is the abysmal conditions of physical infrastructure – transportation, housing, power, etc. – in most of the states of India. A state can, therefore, start investing in building up basic infrastructure for the people by taxing capital and citizens in the high-income brackets; solid infrastructure can be as strong an incentive for private capital as soft loans and hidden subsidies. The point of these interventions would be, in the medium and long urn, to initiate reversal of the “race to the bottom” that every state seems to be in the grip of. Unfortunately, the West Bengal government seems hell bent on going the opposite way.
Third, complementing these interventions have to be efforts to revitalize mass political activism at the grassroots level. Imagine, for a moment, a strong, countrywide mass movement against neoliberalism. If Singur in re-enacted in Uttarakhand and Himachal Pradesh and Karnataka, then where will the TML go? Wherever it sets up shop, it will have to do so without the luxury of externalizing the costs onto the working people and the environment. Simple economic logic suggests that forcing capital to internalize its costs by an active mass political movement would in fact ensure that the decisions taken by capital will be closer to what could be considered socially optimal. Mass participation in planning and implementation would, further, increase much-needed accountability of both the state and capital. Unfortunately again, the West Bengal government wants to go the other way.
Conclusion
This brief analysis of the details of the proposed Tata-Singur project in West Bengal offers us an unique opportunity to think about the industrialization strategy of the Indian state today. One of the major thrusts of this strategy is to build up so-called Special Economic Zones (SEZs) all over the country. As of August 11, 2008 there were 250 notified SEZs across the country. Since each of these SEZs more or less replicate the policy regime applicable to the proposed Tata-Singur project – with magnanimous tax holidays and soft loans and subsidized power and “flexible” labour laws and absence of all environmental regulations – it would probably not be far from the truth to suggest that each of these SEZs would entail at least the amount of loss that we have calculated above for the Tata-Singur project. This suggests that the total cost to the people of this country of the current neoliberal policy regime would be about Rs. 750,000 crores. How large is this figure? For comparison, consider the fact that the total expenditure of the Indian government was slated to be Rs. 750, 884 crores in budget 2008-09; thus, an amount which is roughly equal to the total expenditure of the Indian government in 2008-09 would be the loss to the nation for embracing neoliberalism. Isn’t it high time we sharpened our struggle against neoliberalism in earnest?
(Comments from Debarshi, Kuver and Partho have substantially improved the argument of this article).
ADDENDA
Benefits of Employment Generation
In my earlier portion of the article, I had stated that a full-blown cost-benefit analysis was not possible with the available information; that is primarily because information about net employment, and therefore the corresponding income, generated in the Tata-Singur project is lacking. There is lot of uncertainty about the possibilities of new employment flowing from the project, and figures for net employment generated varies from a high of 10,000 to a low of 500, the highest figure unsurprisingly coming from TML and the West Bengal government. Though it remains true that a full-blown cost-benefit analysis is not possible, what can certainly be done, as a complement to my previous analysis, is to find the benefits of the net employment generation for the best possible scenario and compare it to the costs entailed by the project. In carrying out such an exercise, we would be conducting a rough cost-benefit analysis with the most favourable assumptions for the West Bengal government and TML. Let us see what we the results are.
To proceed, let me state my assumptions clearly:
(1) There is a net employment generation of 10,000 this year in the Tata-Singur project.
(2) The average wage attached to this new employment is Rs. 60,000 per year.
(3) Due to the multiplier effect of this new income generated in the Tata-Singur project, i.e., due to the backward and forward linkages that it will supposedly establish, income will grow at the rate at which the Indian economy has been growing for the past few blazing years, i.e., at 9% per annum.
Thus, the net income generated during the current year will be Rs. 60 crores (which is 10,000 multiplied by Rs. 60,000); during the next year, the total income generated will be Rs. 65.4 crores; the year after that Rs. 71.29 crores, and so on…
Here is the question that I want to pose: how many years will it take for the net present value of the income stream generated due to the Tata-Singur project (and its multiplier effects) to equal the cost of the project? How many years, in other words, will it take for the total benefits, under these generous assumptions, to equal the total cost incurred due to the project? Recall that, as we have seen earlier, the total cost of the project is roughly Rs. 3000 crores on a net present value basis? So, how many years will it take for the benefits to equal Rs. 3000 crores?
And here is the answer: 127 years!
What does this imply? Let us think a little carefully. The net employment generation figure is by all accounts a gross exaggeration. As we have argued earlier, the component of employment that will go to unskilled labour is relatively small. Given the fact that the semi-agricultural labour population in Singur is most likely to be absorbed, if at all, as unskilled labour, the employment prospects of these people are extremely limited. Additionally there is the aspect of job destruction which we have so far ignored; it is most likely the case that the quantum of jobs destroyed due to the project is higher than the jobs that will be created. Hence, in all probability, the net employment generated by the project is negative. Thus, in assuming that the net employment generated by the project is 10,000 we are inflating the figure many times over. The fact that we have also assumed the wages to be Rs. 60,000 per annum only adds to the exaggeration. Since most of the employment for the people of Singur will be in the form of unskilled labour, a salary of Rs. 5,000 per month is a certainly high figure.
Similarly, the assumption that the total multiplier effect of the new employment will be a growth of 9% per annum year after year is also an exaggeration. If the multiplier effect of the new employment would generate 9% additional every year, it would mean generating about Rs. 5.4 crores of additional income in the second year, about Rs. 5.9 crores of additional income in the third years and so on… Even the Indian economy is expected to slow down, from its current 9% growth rate, due to the global financial crisis. Hence, an annual growth rate figure of 9% for income generated most certainly inflates the benefits accruing from the Tata-Singur project in terms of employment and income.
What all this means is that even under extremely favourable assumptions, the cost of the Tata-Singur takes 127 years to be recouped. A reasonable time frame to recoup the costs of the project would require an unrealistically high rate of income growth, something which is anyway unlikely given that the world economy seems headed towards a deep recession. Thus, it seems that the costs of the Tata-Singur project far outweighs the benefits that can reasonably be assumed to flow from undertaking it.
Agreement between Tata Motors Ltd., Government of West Bengal and WBIDC
1. Tata Motors Ltd. (TML) was intending to set up a manufacturing Plant for Automobile Products including “Tata Small Car” to manufacture 250,000 cars per annum on 2 shift basis which could be expanded to 350,000 on 3 shift basis. In addition, it would have several Vendors and act as a mother plant for many aggregates to tune of 500,000 cars. In this connection, TML was considering locating the plant in the States of Uttarakhand/ Himachal Pradesh in view of the fiscal incentive package for the rapid industrialization being made available by the Govt. of India to new Industries in these States which has been attracting a large number of industries to these States. The incentive package in Uttarakhand/Himachal Pradesh consists of:-
(a) 100% exemption from Excise Duty for 10 years.
(b) 100% exemption from Corporate Income Tax for first 5 years and 30% exemption from Corporate Income Tax for next 5 years.
2. The Government of West Bengal (GoWB) is keen to take appropriate steps for rapid industrialization in West Bengal and in this connection wanted to attract some major Automobile Projects to the State. The Government of West Bengal approached TML to persuade them to locate an Automobile Project including the project to manufacture “Tata Small Car” in West Bengal. TML showed interest in locating the plant in West Bengal, provided the State gave Fiscal incentive equivalent to the value of total incentives it would have received by locating the plant in Uttarakhand / Himachal Pradesh. GoWB offered to match the financial incentives in equivalent terms and invited TML to set up the Small Car plant in West Bengal entailing investment of over Rs. 1500 crores by TML. In addition, Vendors supporting the project are likely to make further investment of over Rs. 500 crores.
3. Since then numerous discussions have been held and based on this understanding, GoWB proceeded with identification of various lands for this mega project. Land of approximately 1000 acres chosen in P. S. Singur of District Hooghly was finalized with TML. West Bengal Industrial Development Corporation Ltd. (WBIDC) commenced the process of acquisition of this land. The process was completed with the Declaration of Award under Section 11 of the Land Acquisition Act, and thereafter WBIDC has obtained mutation of ownership in its name in the Record-of-Rights, and conversion of usage of the land from agriculture to factory.
4. WBIDC is in possession of 997.11 acres of land, which has been acquired under the Land Acquisition Act. Out of this, an area admeasuring 645.67 acres will be leased to TML for setting up the Automobile Project including the small car plant, while an area admeasuring 290 acres will be leased to the vendors to this Automobile Project approved by TML (ancillary and component manufacturing units), 14.33 acres will be handed over by WBIDC to WBSEB only for construction of 220/132/33 KV substation and the balance admeasuring 47.11 acres will be used by WBIDC for rehabilitation activities for the needy families amongst the Project affected persons.
5. The terms of lease to TML for the 645.67 acres of land for the mother plant are described below. In addition, WBIDC will provide on lease 290 acres of land to the Vendors selected and approved by TML on payment of Premium equal to the actual cost of acquisition plus incidentals, to be calculated on the basis of the total acquisition cost and other incidental expenses expended by WBIDC or any of its subsidiaries (duly certified by its auditor) averaged over the total land acquired. The lease rental payable per year per acre by the vendors will be Rs. 8000/- per acre for the first 45 (forty five) years and Rs. 16000/- per acre for the next 45 (forty five) years. The initial lease tenure will be 90 years. On expiry of 90 years, the lease terms will be fixed on mutually agreed terms at that point of time.
6. The parties also discussed mutually to finalise the package of incentives required in order to enable GoWB to fulfill its commitment to match in equivalent financial terms the fiscal incentive foregone by TML in Uttarakhand. The Net Present Value (NPV) computation of benefits that the project would have received in Uttarakhand is attached in Annexure I which is agreed to by all the parties. Sample computation of benefits in West Bengal with stated assumptions is given in Annexure II which is accepted by all parties as agreed basis of computation. The NPV is calculated @ 11%.
7. Accordingly, it is finally agreed, in supersession of all previous decisions and agreements in this regard, that for this mega project, the fiscal incentives under Industrial Promotion Assistance in terms of the West Bengal Incentive Scheme (WBIS 2004), assistance towards land cost and interest subsidy in the form of a loan against a quantum of the term loan to be taken by TML for this project will be offered by GoWB as follows:-
(a) WBIDC will provide Industrial Promotion Assistance in the form of a Loan to TML at 0.1% interest per annum for amounts equal to gross VAT and CST received by GoWB in each of the previous years ended 31st March on sale of “Tata Small Car” from the date of commencement of sales of the small car. This benefit will continue till the balance amount of the Uttarakhand benefit (after deducting the amount as stated in para 7b and 7c below) is reached on net present value basis, after which it shall be discontinued. The loan with interest will be repayable in annual installments starting from 31st year of commencement of sale from the plant. The loan availed in the first year will be repaid in the 31st year and the loan availed in the 2nd year will be repaid in the 32nd year and so on. WBIDC will ensure that the loan under this head is paid within 60 days of the close of the previous year (on 31st March) failing which WBIDC will be liable to compensate TML for the financial inconvenience caused @ 1.5 times the bank rate prevailing at the time on the amount due for the period of such delay. TML & GoWB will make best efforts to maximize sale of products from the “Small Car Plant” in the State of West Bengal.
(b) WBIDC will provide 645.67 acres of Land to Tata Motors Ltd on a 90 year lease, on an annual lease rental of Rs. 1 crore per year for first 5 years with an increase @ 25% after every 5 years till 30 years. On expiry of 30 years, the lease rental will be fixed at Rs. 5 crores per year, with an increase @ 30% after every 10 years till the 60th year. On the expiry of 60 years, the lease rental will be fixed at Rs. 20 crores per year, which will remain unchanged till the 90th year. On expiry of 90 years the lease terms will be fixed on mutually agreed terms at that point of time. The benefit on account of land would be calculated as the total land area leased out to TML multiplied by the cost of acquisition calculated in the manner as provided in para 5 less NPV of rent payable during 60 years.
(c) The West Bengal Govt. will provide to TML a loan of Rs. 200 crores bearing @ 1% interest per year repayable in 5 equal annual installments starting from the 21st year from the date of disbursement of loan. This loan will be disbursed within 60 days of signing of this Agreement.
(d) The West Bengal Government will provide Electricity for the project at Rs. 3/- per KWH. In case of more than Rs. 0.25 per KWH increase in tariff in every block of five years, the Government will provide relief through additional compensation to neutralize such additional increase.
8. It is also agreed that the computation of the comparison of benefits in Annexure I and II will be changed if there are any changes in the rates of excise duty and corporate income tax during the next 10 years.
Posted by Deepankar Basu March 25, 2008 at 8:34 pm in Labour, Marxism, Politics, Working Class
Dipankar Basu, Sanhati
Abstract: This article attempts to throw some light on the following two questions: (1) How does the classical Marxist tradition conceptualize the relationship between the two stages of revolution: democratic and the socialist? (2) Does the democratic revolution lead to deepening and widening capitalism? Is capitalism necessary to develop the productive capacity of a society? The answer to the first question emerges from the idea of the “revolution of permanence” proposed by Marx in 1850, accepted, extended and enriched by Lenin as “uninterrupted revolution” and simultaneously developed by Trotsky as “permanent revolution”. This theoretical development was brilliantly put into practice by Lenin between the February and October revolutions in Russia in 1917. The answer to the second question emerges clearly from the debates on the national and colonial question in the Second Congress of the Third International in 1920. From this debate what emerges is the idea of the democratic revolution led by the proletariat as the start of the process of non-capitalist path of the development of the productive capacity of society, moving towards the future socialist revolution. Rather than deepening and widening capitalism, the democratic revolution under the proletariat leads society in the opposite direction, in a socialist, i.e., proletarian direction. Promoting capitalism is not necessary for the development of the productive capacity of a country.
This brief historical note has been occasioned by recent attempts to justify the championing of capitalism by a communist party – Communist Party of India (Marxist) – as the vehicle for its industrialization program in West Bengal, India. The justification, which argues for the necessity of capitalism by taking recourse to the distinction between the two stages of revolution, rests on an erroneous reading of international working class theory and practice. While it correctly posits the distinction between the two stages of social revolution, it does so mechanically, formally, and in a one-sided manner; the crucial and related question of the relationship between the two stages is not accorded the attention it deserves. That, in my opinion, is the primary source of error and leads to arguing for the necessity of “deepening and widening” capitalism as against initiating efforts to transcend it. Such a reformist position is of course not new within the international working class movement; in fact it is strikingly similar in several crucial respects to the Menshevik position in early twentieth century Russia as also to the stance of “social democracy” that developed from Bernstenian “revisionism” in late nineteenth century Germany. This position, moreover, is decidedly not part of the Leninist tradition – the Bolshevik tradition that developed in Russia – or any revolutionary tradition within Marxism; this should be immediately obvious from the enormous theoretical and political effort that Lenin put in combating its deleterious consequences for the historical project of the Russian proletariat.
The issue of the analytical distinction between the two stages of the world-historical revolution has been accepted within the international working class movement, at least of the Marxist variety, for about 150 years. With the publication of the Communist Manifesto, this issue was more or less settled among communists. In pre-revolutionary Russia, this distinction was accepted by all streams of Marxists: the Legal Marxists, the Economists and the Social-Democrats. This distinction was never the bone of contention in the fiery debates in pre-revolutionary Russia between the Bolsheviks and the Mensheviks. Neither was this distinction a major point of departure in pre-revolutionary China; nor is this distinction the point of debate within the Marxist left in India. Hence, merely positing this distinction anew, a century after it was accepted by the international working class movement, is hardly sufficient for the development of a Marxist theoretical position. Attention needs to be instead focused, in my opinion, on the more important issue of correctly conceptualizing the relationship between the two stages.
It is not merely a recognition of the distinction but the conceptualization of the relationship between the two that distinguishes the various streams of the Left; that is as much true today as it has been historically. I will demonstrate, by a careful reading of the historical development of Marxist theory and practice, that it is the conceptualization of this relationship that has distinguished the revolutionary from the reformist Marxist stream at crucial historical junctures: Marx and Engels from the other socialists during the middle of the 19th century; the Legal Marxists and the Economists from the early Social-Democrats (including the young Lenin) during the last decade of the 19th century in pre-revolutionary Russia; the Mensheviks from the Bolsheviks in later years leading up to and after the October revolution; Lenin (and Trotsky) from the other Bolsheviks between the February and October revolutions.
Before beginning the main story, two clarifications are in order. First, I would like to state more precisely the sense in which the word “revolution” is used, and second, I would like to indicate the two very different senses in which the phrase “social democrat” will be used throughout this paper. Revolution, in this paper, stands for social revolution, a phenomenon which has been defined by Theda Skocpol’s in the following way:
“Social revolutions are rapid, basic transformations of a society’s state and class structures; and they are accompanied and in part carried through by class-based revolts from below… What is unique to social revolution is that basic changes in social structure and in political structure occur together in a mutually reinforcing fashion. And these changes occur through intense socio-political conflicts in which class struggles play a key role.” (Skocpol, 1979)
As Foran (2005) has argued, there are three important characteristics of a social revolution (embedded in the above definition) that needs to be always kept in mind: rapid political change, deep and lasting structural transformation of the economy and active mass participation; whenever I refer to revolution, I will mean the explosive combination of these three elements.
The second point is a terminological clarification regarding the two diametrically opposed use of the phrase “social democrat” in this paper. Social-democrat, with the all important hyphen, will refer to the Marxist revolutionaries in Russia; that is precisely how they referred to themselves and I want to stick to that terminology as well. The hyphen between “social” and “democrat” denotes the indissoluble link between the dual historical tasks of the international proletariat, a theme we will return to constantly throughout this paper. Recall that the first Marxist political party in Russia was called the Russian Social-Democratic Workers Party (RSDWP); though Lenin’s April Theses in 1917 had ended with the proposal to change the name of the RSDWP, it was only in 1918 that the party formally started using the term that Marx had preferred: communist.
Social democrat, without the hyphen, on the other hand will refer to representatives of the reformist trend in the international working class movement: Bernstein and his followers, the later Kautsky, the later Plekhanov and the Mensheviks in Russia certainly but also later day reformist socialists in Europe and Asia. Note, in passing, that social democracy has a long history, especially in Western Europe, and is marked by certain unmistakable characteristics which we can easily discern in our midst even today: legal opposition within a bourgeois parliamentary framework, willingness to ally with sundry bourgeois parties, undue and an over emphasis on the need for reforms within the system, indefinite postponement of decisive struggles, the attempt to “manage” the contradiction between labour and capital rather than to resolve it in the favour of labour, etc. The reformist and the revolutionary streams also differ markedly in their understanding of social revolution: for the reformists, revolution will emerge ready made from the womb of history by its ineluctable laws; the role of human intervention, though formally accepted, is relegated to a secondary position. For revolutionaries like Lenin and the Bolsheviks and Trotsky, on the other hand, revolution has to be first and foremost made by human intervention, mass political action riding on the tide of history.
Marx: From the Manifesto to the Communist League
In the Communist Manifesto published on the eve of a revolutionary wave in Europe in 1848, Marx and Engels had summarized the materialist understanding of historical development. The struggle between social classes was identified as the motor force of historical change, with the victorious class rapidly reorganizing the whole structure of material production accompanied by changes in the political, cultural and ideological spheres of social life. Generalizing from English and French history, Marx and Engels identified two stages in this world-historical movement: the bourgeois-democratic revolution and the proletarian-socialist revolution. The bourgeois revolution, led by the revolutionary bourgeoisie, in alliance with the oppressed peasantry, would overthrow the feudal order and usher in bourgeois capitalism. The development of capitalism would go hand in and with the growth and development (political, social, ideological and technological) of the proletariat, the grave digger of capitalism; in due time, when the productive forces of society had developed to support a higher form of social organization and when the proletariat had become mature and strong politically, it would usher in the socialist revolution and begin the process of the transcendence of class society.
Quite early on Marx had started realizing the limitations of the strict schema of the two stages of revolution (the bourgeois-democratic to be followed by the proletarian-socialist) that he had generalized from English and French history and that he, along with Engels, had so eloquently summarized in the Communist Manifesto. There are two historical reasons which, to our mind, prompted Marx to question this schema. First, the whole generalization referred to a historical period where the proletariat had not yet entered into political stage; if the proletariat were to enter the historical stage even before the completion of the bourgeois-democratic revolution that would change the historical dynamics radically. Second, there might be historical reasons because of which the bourgeoisie of a particular country is “weak” and therefore incapable of and unwilling to lead the democratic revolution to completion; and so in this case, the strict schema presented in the Communist Manifesto would again need modification. With the advantage of hindsight we can see that the modifications that would need to be worked out would specifically relate to two issues: the relationship between the two revolutions and the class-leadership in the democratic stage of the revolution.
A close reading shows that even in the Communist Manifesto, Marx and Engels had taken care to allow possibilities of different trajectories, than the one they had sketched, in concrete circumstances. For instance, they had explicitly referred to the potential weakness of the German bourgeoisie and therefore hinted at the possibility of the proletariat having to take the responsibility of the democratic revolution. Once the German bourgeoisie had shown it’s true colors in 1848, whereby it regrouped with feudal elements to keep the proletariat in check and thereby aborted the democratic revolution, Marx had started his decisive move away from the schema of the Manifesto. While maintaining the analytical distinction between the two stages, he drew a much closer link between them. This more nuanced position was explicitly brought to the fore in his address to the Central Committee of the Communist League in London in 1850. Drawing lessons from the recent revolutionary upsurge in Europe and looking to the future, he drew attention of the international working class to the essential continuity between the two stages of the revolution, what Lenin would later characterize as the “indissoluble link” between the two revolutions.
“While the democratic petty bourgeois wish to bring the revolution to a conclusion as quickly as possible … it is our interest and task to make the revolution permanent, until all more or less possessing classes have been forced out of their position of dominance, until the proletariat has conquered state power and the association of proletarians, not only in one country but in all the dominant countries of the world, has advanced so far that competition among proletarians of these countries has ceased and that at least the decisive productive forces are concentrated in the hands of the proletarians. For us the issue cannot be the alteration of private property but only its annihilation, not the smoothing over of class antagonisms but the abolition of classes, not the improvement of existing society but the foundation of a new one.” (Marx, 1850)
The two most crucial, and intimately related, ideas that stand out in this speech are the utmost necessity of maintaining the independence of the proletariat vis-a-vis the liberal bourgeoisie and of realizing the continuity of the two revolutions in practice. Arguing for the creation, in all situations and at all costs, of an independent party of the proletariat, Marx had exhorted the proletariat at the same time to aim for the “revolution of permanence”.
“But they [i.e., the proletariat] must do the utmost for their final victory by clarifying their minds as to what their class interests are, by taking up their position as an independent party as soon as possible, and by not allowing themselves to be seduced for a single moment by the hypocritical phrases of the democratic petty bourgeois into refraining from the independent organization of the party of the proletariat. Their battle cry must be: The Revolution of Permanence.” (Marx, 1850)
This remarkable document, in essence, foreshadows much of what emerged as Bolshevism in late nineteenth century Russia. The tight and indissoluble link between the twin tasks of the proletariat (and hence the indissoluble link between the democratic and the socialist revolutions), the utmost importance of maintaining an independent political position of the proletariat, the utter necessity of avoiding tailism in practical politics, themes that were hammered out later by the Bolsheviks in the heat of the Russian revolution are already present in Marx’s speech to the Communist League. It is clear that Lenin’s idea of an “uninterrupted revolution”, a position he stressed in his debates with the reformists in Russia, and Trotsky’s idea of a “permanent revolution” are both derived from this speech of Marx.
Note however that the formulation of the necessity of the “leadership” of the proletariat in the bourgeois-democratic revolution is still not explicitly developed by Marx. Revolutionary social-democrats in Russia, reflecting on and reacting to the specific context of the Russian revolution extended the classical Marxist framework by taking the idea of the class-independence of the proletariat, which is already there in Marx, one step further by arguing for its leadership position in the bourgeois-democratic revolution.
Legal Marxists and Economists: Early Debates in Russia
The origin of the Russian Communist Party (Bolshevik) can be traced back to a relatively little known “conference” of nine men in Minsk in March 1898. Though none of the nine men played any leading role in the subsequent revolutionary history of Russia, the conference did come out with a “manifesto of the Russian Social-Democratic Workers’ Party” as a precursor of later-day party programmes. The manifesto unequivocally accepted Marx’s historical account of the two stages of the future social revolution (as worked out by Marx and Engels in the Communist Manifesto): bourgeois-democratic and the proletarian-socialist revolution. More important and interesting from our viewpoint, the Minsk conference manifesto went on to argue that the Russian bourgeoisie was incapable of carrying through the bourgeois-democratic revolution to the end and thus identified the young Russian proletariat as the historical agent on whose able shoulders fell the “dual task” of both revolutions: the democratic and the socialist.
When, therefore, the second Congress – the defining congress of the Russian revolution, the birthplace of Bolshevism as a political stream – of the Russian Social-Democratic Workers’ Party (RSDWP) met in 1903 to debate on the party programme, it worked within the framework inaugurated by the conference of 1898. It started with the dual tasks of the Russian proletariat, i.e., the twin tasks of the democratic and the socialist revolution, as an axiom, as a point of departure, as a self-evident historical and political truth; there was no disagreement or debate on this point with the RSDWP. The real debate was on how to define the content of these revolutions and on how to define the relationship between the two; it was the issue of the relationship that was to rend the RSDWP into two factions, the Mensheviks and the Bolsheviks. But before looking at that debate, we must spend some time studying the debates that preceded the second Congress, the debates of the young Lenin with the Legal Marxists and the Economists; a study of the early debates is interesting and useful because many of the positions of the Mensheviks were repetitions of either the Economists’ or the Legal Marxists’ discredited positions, positions against which the whole RSDWP had argued during these early years.
Before the RSDWP could consolidate the political-economic tasks of the proletariat concisely in a party programme, it had to successfully argue against three contemporary socialist trends within late-nineteenth century Russia: the Narodniks, the Legal Marxists and the Economists. The theoretical arguments against the Narodniks were largely, and successfully, carried home by Plekhanov, the Father of Russian Marxism; when Lenin did join the fray, he largely repeated Plekhanov’s arguments and marshaled empirical evidence in favour of the general Marxist point about the development of capitalism in Russia. From this he drew an important political conclusion that separated the Social-Democrats from the Narodniks forever: the proletariat and not the peasantry was to be the historical agent of social revolution in Russia. The development of capitalism in Russian agriculture was, according to Lenin, accelerating the class divisions among the peasantry; the peasantry, as a single, homogeneous social entity was rapidly disappearing and so basing a strategy of social revolution on this vanishing social entity was historic folly. The only stable social class that was emerging and strengthening itself with capitalism and whose interests were in contradiction to capitalism was the proletariat; hence, argued Lenin, the only feasible strategy of revolution could be one led by and in the long-term interests of the proletariat.
As to the other two trends, Legal Marxism and Economism, it was Lenin’s energetic intervention and crystal-clear prose that ripped apart their arguments and exposed their utter hollowness. As Lenin remarked several times later in his life, the debate with the Legal Marxists and the Economists foreshadowed the subsequent, fierce and often bitter, debates between the Bolsheviks and Mensheviks. In both debates, as also his debates with the Narodniks, what distinguished Lenin’s position from his opponents was his consistent, unwavering and uncompromising class viewpoint, the viewpoint of the emerging Russian proletariat.
Lenin’s debate with the Legal Marxists and the Economists (rather than with the Narodniks) is more relevant for our current discussion because this debate related directly to the issue of the correct understanding of the relationship between the dual tasks of the proletariat. The tidy schema of revolution worked out by Marx and Engels in the Communist manifesto was a generalization from English and French history, as we have already remarked. It distinguished analytically between the bourgeois and the socialist revolutions and stressed the historical precedence of the former to the latter. We have already seen how Marx himself modified this schema in the concrete context of nineteenth century Germany; the Legal Marxists, on the other hand, stuck to this schema in a most doctrinaire fashion (foreshadowing the whole history of social democracy and reformism) and with disastrous consequences.
Accepting the Marxist distinction between the two revolutions and the historical precedence of one over the other led the Legal Marxists to argue for the reformist path to the transcendence of capitalism. One of it’s leading proponents, Peter Struve, chastised Russian socialists for concerning themselves with fanciful and unrealizable projects of “heaven storming”; he, instead, wanted them to patiently “learn in the school of capitalism”. The echo of that Legal Marxist injunction can still be heard, via Bernstein’s “revisionism” in late-nineteenth Germany, in social democratic circles in India today! This was, of course, an abandonment of the proletarian viewpoint, as Lenin pointed out. The mistake of the Legal Marxists lay precisely in an incorrect understanding of the relationship between the dual tasks of the proletariat. The democratic revolution was not an end in itself, as the Legal Marxists tended to implicitly suggest, but was inseparably tied with it’s twin, the socialist revolution. It is not that the Legal Marxists did not accept the necessity of the socialist revolution; being Marxists, they had to accept it as later-day social democrats did. But this acceptance came with the caveat that the period separating the two revolutions was so large that in essence one could very well forget about the socialist revolution at the moment and instead engage in activities to “learn in the school of capitalism”.
Though the Economists took a different lesson from the neat schema of the Communist Manifesto as compared to the Legal Marxists, they arrived at the same practical conclusions. For the Economists, it was important to draw a sharp distinction between the economic and the political spheres. In their opinion, workers were only concerned with economic issues, issues of wage and work, that directly effected their daily lives; they were not concerned with political issues, issues of political freedom and governance and power. The political sphere, according to the Economists, was the sole preserve of intellectuals; since, moreover, the current conditions called for a bourgeois-democratic revolution, socialist struggles, i.e., struggles for the capture of state power by the proletariat, were pushed into the indefinite future. Juxtaposing a sharp distinction between the economic and the political with their reading of the schema of the Communist Manifesto led the Economists to suggest that socialists should restrict themselves “to support[ing] the economic struggle of the proletariat and to participat[ing] in liberal opposition activity”. What was ruled out was an independent political party of the working class, which axiomatically ruled out revolutionary political activity.
In an early piece on this issue in 1898, Lenin made clear the correct Marxist understanding of the matter and distinguished the social-democrats sharply from the Legal Marxists and the Economists:
“The object of the practical activities of the Social-Democrats is, as is well known, to lead the class struggle of the proletariat and to organize that struggle in both its manifestations: socialist (the fight against the capitalist class aimed at destroying the class system and organizing socialist society), and democratic (the fight against absolutism aimed at winning political liberty in Russia and democratizing the political and social system of Russia). We said as is well known. And indeed, from the very moment they appeared as a separate social-revolutionary trend, the Russian Social-Democrats have always quite definitely indicated this object of their activities, have always emphasized the dual manifestation and content of the class struggle of the proletariat and have always insisted on the inseparable connection between their socialist and democratic tasks — a connection clearly expressed in the name they have adopted.” (Lenin, Collected Works, vol. 2, p. 327)
The inseparability of the dual tasks of the proletariat derives, according to Lenin, from the following two facts: first, the proletariat can only emancipate itself fully, and thereby society, through political liberty. Hence, it supports the struggle for political liberty against absolutism and feudal oppression as its own struggle, as the political bed on which will grow the socialist struggle. This is the reason why the class conscious proletariat supports every revolutionary movement against the present social system, why it supports the struggle of progressive classes against reactionary classes and strata in general. Second, among all the classes and strata fighting for democracy, the proletariat is the only thoroughly consistent, unreserved, staunch and resolute supporter of democracy; it is the only class which is ready to take the fight for democracy to its end, to its natural culmination, to its full completion. Every other class, by its very position within the class structure of society, can only provide qualified support to the struggle for democracy; their democracy is half hearted, it always looks back, as Lenin put it. An understanding of the social-democratic party as “deriving its strength from the combination of socialist and democratic struggle into the single, indivisible class struggle of the … proletariat” remained the hallmark of Bolshevism right through the tumultuous days of the victorious October revolution.
It is this insistence on the uninterruptedness of the twin revolutions that found expression in the Bolshevik formulation of the proletariat as the leader of both the revolutions; and it is the recognition of this historical role of the proletariat that informed the refusal of the Bolsheviks to relinquish the leadership role to the bourgeoisie, to become its political “tail”. It is the same dogged insistence, so strikingly consistent, that led to the split with the Mensheviks in 1903.
Two interesting and important things emerge from these early debates. First, some of the ideas that were to dominate the subsequent debates of the Russian revolution, the ideas moreover that would separate the Bolsheviks from the Mensheviks (the revolutionaries from the reformists) and would separate Lenin (and Trotsky) from the rest of the Bolsheviks between the February and the October revolutions, were introduced within the Russian working-class movement at this juncture. It is these ideas, among others, that would be refined, deepened, enriched and applied with uncanny consistency in the subsequent history of the Russian revolution. Second, that an eclectic, half-hearted, formal and mechanical acceptance of Marxism can be combined with utterly reformist politics came to the fore with rare clarity in Russian history for the first time during these early debates. As later events demonstrated, and continues to demonstrate to this day, formal acceptance of Marxism can often be combined with reformist politics.
A closer reading of international working class history demonstrates that acceptance of Marxism alongside reformist practice is already hidden as a possibility in the formulation of the “dual tasks” of the proletariat. It must be recalled the formulation of the “dual tasks” found its way into the programme of the RSDWP in the distinction between the minimum and the maximum programmes. The minimum programme referred to the set of measures that could be implemented within, and without challenging, a bourgeois democratic setup. Following the Communist Manifesto, these included abolition of private property in land, a progressive income tax, abolition of inheritance, free education for all and other such concrete measures of bourgeois reform. The maximum programme, on the other hand, enshrined revolutionary aspirations, the overthrow of capitalism and the beginning of socialist construction. The distinction between the minimum and maximum programmes thus provided space for reformist politics by a gradual and subtle decoupling of the two programmes and shifting the emphasis on the former.
“One of the unforeseen effects of this division [between the minimum and and maximum programmes] was to attract into social-democratic parties a large body of members who by conviction or temperament were more interested in the minimum than in the maximum programme; and in countries where some of the minimum demands had in fact been realized, and others seemed likely to be realized in the future, through the process of bourgeois democracy, the parties tended more and more to relegate the demands of the maximum programme to the category of remote theoretical aims concentrate party activities on the realization of the minimum programme.” (Carr, 1952, p. 17-18, emphasis added).
Lessons of 1905: Bolsheviks and Mensheviks
Though the dispute between what later came to be known as the Bolsheviks (“the majority”) and the Mensheviks (“the minority”) during the second congress of the RSDWP in 1903 seemed to rest on an issue of party statute, i.e., what should be the qualification for party membership, later events made clear that deeper issues of theory and practice were involved. As the bitter debates following the split in the party were to make clear, the schism in the RSDWP really rested on different ways of understanding the relationship between the dual tasks of the proletariat in concrete, practical terms. This followed quite clearly from the diametrically opposite political lessons the two streams drew from the failed revolution of 1905. The difference can be most clearly seen if we organize the discussion around the following two questions: (1) relationship of the two revolutions, and (2) the role of the peasantry.
The Mensheviks adhered to the cut-and-dried formula about the strict sequence of the two revolutions that they picked up in a doctrinaire fashion from the Communist Manifesto. For the Mensheviks, the bourgeois revolution had to come first and so far the Bolsheviks were in agreement with them. The doctrinaire understanding of the Mensheviks, their intellectual sterility, came to the fore when they went on, from this correct premise, to insist that it was “only through the bourgeois revolution that capitalism could receive its full development in Russia, and, until that development occurred, the Russian proletariat could not become strong enough to initiate and carry out the socialist revolution” (Carr, 1950, p.39). In other words, the two revolutions must be separated by an indefinite period of time during which capitalism needs to develop, flourish, and display its bourgeois magic.
In effect, therefore, the Mensheviks never fully agreed with Lenin’s 1898 formulation of the “indissoluble link” between the two revolutions; in fact their position was a regression even from the position worked out by the first Congress in 1898 in Minsk. That is why they could insist on allowing capitalism in Russia to receive it’s “fullest development” and only then initiating the struggle of the proletariat for socialism. The immediate and practical implication of the Menshevik understanding was what Lenin termed political “tailism”, i.e., allowing the proletariat as-a-class to become an appendage to, a follower of, the bourgeoisie in the democratic revolutionary struggle instead of forcibly usurping the leadership position for itself.
The Menshevik position followed from an incorrect class analysis of Russian society; their chief error was to neglect the emergence of the proletariat on the historical scene and to take the cue from the Marx of the Communist League to re-work the schema of the Manifesto. Thus, on the eve of the revolution, one of their leading spokesmen could say:
“If we take a look at the arena of the struggle in Russia then what do we see? Only two forces: the tsarist autocracy and the liberal bourgeoisie, which is now organized and possesses a huge specific weight. The working mass, however, is atomized and can do nothing; as an independent force we do not exist; and thus our task consists in supporting the second force, the liberal bourgeoisie, and encouraging it and in no case intimidating it by presenting our own independent political demands.” (quoted in Zinoviev, 1923).
This is precisely where Lenin differed sharply from Menshevik class analysis and politics; Lenin’s analysis of the the 1905 revolution started in fact with the recognition of the entrance of the Russian proletariat on the historical scene. From this fact he drew the conclusion that Marx had hinted at in his speech to the Central Committee of the Communist League in 1850: the bourgeoisie was neither willing nor capable of completing the bourgeois-democratic revolution. This was both because it was weak (lacking in independent development) and because it realized that completion of the democratic revolution carried within it the danger of the proletariat’s political ascendancy. Thus, completion of the bourgeois-democratic revolution, as a prelude to the consummation of the socialist revolution, fell on the shoulders of the Russian proletariat. The tight link between the two revolutions, a position that Lenin had already worked out in 1898, was reiterated once again:
“From the democratic revolution we shall begin immediately and within the measure of our strength – the strength of the conscious and organized proletariat – to make the transition to the socialist revolution. We stand for uninterrupted revolution. We shall not stop half way” (Lenin, Collected Works, Vol. 9, p. 237)
According to Lenin’s analysis, two important conditions had to be satisfied for the Russian proletariat to complete its dual historical tasks: (1) successful alliance of the proletariat and the peasantry, and (2) victorious socialist revolutions in European countries. It was on the crucial question of the alliance with the peasantry that Lenin differed sharply not only from the Mensheviks but also from Trotsky (who had otherwise worked out a position very similar to Lenin’s). For both the Mensheviks and Trotsky, the peasantry was a repository of reaction; while Trotsky arrived at this incorrect conclusion on the basis of his experience of the 1905 revolution, the Mensheviks adhered to this position out of their doctrinaire understanding of Marxism. Lenin, on the other hand, realized that though the peasantry was not revolutionary in the Narodnik sense but it’s force could still be harnessed for the revolution because at that juncture it was less interested in protecting private property than in confiscating the land-owners’ land, the dominant form of rural private property (Carr, 1950).
Thus, Lenin arrived at an elegant formulation of the role of the peasantry in the revolution. The proletariat, in alliance with the whole peasantry would complete the bourgeois-democratic revolution and overthrow feudalism, absolutism and the monarchy despite the vacillation, or even opposition, of the bourgeoisie. This would immediately lead to the next stage of the revolution, where the proletariat would have to split the peasantry along class lines, ally with the landless labourers and the poor peasantry against the rich peasants and start the transition towards socialism.
This second point, where the urban proletariat had to ally with the rural proletariat was an immensely important practical point. Between the February and October revolutions, where Lenin discerned precisely this transition from the bourgeois-democratic to the socialist stage taking place, the utmost importance of an independent organization of the rural proletariat was repeatedly indicated. For instance in the third of the Letters From Afar written on March 11(24) 1917, which discusses the issue of the proletarian militia, he says:
“The prime and most important task, and one that brooks no delay, is to set up organizations of this kind [i.e., Soviets of Workers’ Deputies] in all parts of Russia without exception, for all trades and strata of the proletarian and semi-proletarian population without exception…for the entire mass of the peasantry our Party … should especially recommend Soviets of wage-workers and Soviets of small tillers who do not sell grain, to be formed separately from the well-to-do peasants. Without this, it will be impossible … to conduct a truly proletarian policy in general…” (Lenin, 1917, in Zizek, p. 41)
In a footnote, he adds: “In rural districts a struggle will now develop for the small and, partly middle peasants. The landlords, leaning on the well-to-do peasants, will try to lead them into subordination to the bourgeoisie. Leaning on the rural wage-workers and rural poor, we must lead them into the closest alliance with the urban proletariat.” Note that in Lenin’s formulation, the idea of an “agrarian revolution” as the axis of the bourgeois-democratic revolution is not explicitly there; the experience of the Chinese revolution would be required to extend the classical Marxist framework further by explicitly theorizing the nature and complexities of the agrarian revolution in a semi-feudal, semi-colonial social formation as part of what Mao called the new democratic revolution. This constant and critical engagement with received wisdom is the hallmark of a living revolutionary tradition.
Revolution at the Gates: Between February and October 1917, and Beyond
The February 1917 revolution in Russia caught all the socialists unawares; neither had they planned for it nor had they participated in it. This was true as much of the Mensheviks as of the Bolsheviks. The revolution had given rise to a situation of “dual power”: a Provisional Government of the bourgeoisie and the landlords and a revolutionary-democratic dictatorship of the workers and peasants (in the form of soldiers) in the form of the Soviets. The crucial question that again divided the revolutionaries from the reformists was a correct understanding of the relationship between the two.
For the Mensheviks, the problem was resolved in a rather straightforward manner. In keeping with their schematic reading of Marxism, they saw the task of the proletariat at the present moment to be one of supporting the bourgeoisie and helping it complete the democratic revolution; hence they argued for the Soviets supporting the Provisional Government, pushing for democratic reforms from behind rather than leading them, in short aiding in the “fullest development” of bourgeois capitalism till such time that it [capitalism] exhausted all it’s progressive possibilities and the proletariat became mature and strong enough to make the final bid for power. All the Bolshevik leaders, including Stalin, accepted the Menshevik position in essence. It was left to the political genius of Lenin to break through this reformist consensus.
Exiled in Switzerland and getting news about Russian development only through the bourgeois press, Lenin had already started developing the essentials of revolutionary understanding about the transition from the first to the second stage of the revolution; his Letters From Afar give indications of the direction of his thinking. To the complete astonishment of his followers, the first public statement that Lenin made immediately after his arrival in the Finland station in Petrograd in April 1917 was to hail the proletarian-socialist revolution and not to dish out homilies for the bourgeois-democratic revolution! When he presented his April Theses within party circles the next day, outlining a program for the transition to a socialist stage of the revolution, he was completely isolated. Bogdanov is said to have constantly interrupted his speech with shouts of “Delirium, the delirium of a madman,” and not one Bolshevik other than Kollantai spoke in favour of his plans. When it was published in the Pravda, the editorial team distanced itself from the argument by attributing it to an individual and not to the Party.
Between the February and the October revolution, Lenin applied with ferocious consistency the theory that he had developed so painstakingly in his debates with the reformist Mensheviks. Formulations of the indissoluble link between the two stages of the revolution and the associated idea of the leadership of the proletariat (in alliance with the peasantry) in the democratic revolution, which he had argued for tirelessly over the years were now about to be realized in practice. The fact that the proletariat and the peasantry (in the form of soldiers) had established an independent, revolutionary site of political power in the form of the Soviets was the crucial signal to Lenin that the bourgeois-democratic revolution had been completed and that the transition to the next stage was underway. Since there could not be two powers in the State, only one of the two – proletarian or bourgeois – would survive in the ensuing struggle that he could foresee. The task of the proletariat, therefore, was to start preparing for the overthrow of the Provisional Government and transferring all power to the Soviets, and not to stand up in support of the bourgeoisie, as the Mensheviks argued. Waiting for the “fullest development” of capitalism, as reformist doctrine suggested, was tantamount to ensuring that the Soviets got crushed by force like the Paris Commune in 1871.
Note that in Lenin’s insistence on the completion of the bourgeois-democratic stage of the revolution there is no place for the discourse of productive forces or the development of capitalism. It was not that capitalism had flourished and the productive forces had developed adequately in Russia between February and October 1917 to warrant the call for a socialist revolution; that was obviously not the case as the Bolsheviks were acutely aware. It was rather the case that the establishment of the revolutionary dictatorship of the proletariat and the peasantry was envisioned as an alternative path of development, a non-capitalist framework of social relations for the development of the productive forces. It is of course not true that the democratic revolution establishes socialism; its social and economic content remains bourgeois, but with the proletariat at the helm of affairs, a transition towards socialism is initiated, the movement is imparted an unmistakable socialist, i.e., proletarian orientation.
In the context of imperialism, questions about the character of the two revolutions, about the role of communists in them and about the question of the attitude towards capitalism in the colonial and semi-colonial countries had been discussed threadbare in the Second Congress of the Communist International in July 1920. Even though there were disagreements between Lenin, the official rapporteur on the “national and colonial question”, and M. N. Roy, who presented his own theses on the question, they came out with one striking agreement: where the working class was victorious and able to establish its political hegemony, it could lead the country (essentially the peasant masses) onto the path of socialism without the intervening capitalist stage of development. Presenting his report to the Congress on July 26, Lenin summarized this point of agreement as follows:
“… are we to consider as correct the assertion that the capitalist stage of economic development is inevitable for backward nations now on the road to emancipation and among whom a certain advance towards progress is to be seen since the war? We replied in the negative. If the victorious revolutionary proletariat conducts systematic propaganda among them, and the Soviet governments come to their aid with all the means at their disposal – in that event it will be mistaken to assume that the backward peoples must inevitably go through the capitalist stage of development… the Communist International should advance the proposition, with appropriate theoretical grounding, that with the aid of the proletariat of the advanced countries, backward countries can go over to the Soviet system and, through certain stages of development, to communism, without having to pass through the capitalist stage.” (Lenin, Collected Works, vol. 31, p. 244, emphasis added).
The essence of the democratic revolution under the leadership of the proletariat is the inauguration of a non-capitalist path of economic and social development. As Lenin points in the same report that we have just quoted from, forms of socialist organization, i.e. Soviets, can and should be formed not only in a proletarian context but also in a context marked by “peasant feudal and semi-feudal relations”. It is obvious that these institutions would impart the socialist orientation to the whole movement, would form the seeds of the future socialist society, seeds moreover nurtured, supported, defended and deepened in a still predominantly bourgeois society. To insist, as some have done recently, that the task of the proletariat during the democratic stage of the world historical revolution is to work for deepening capitalism, instead of forging a non-capitalist path of development through Soviet forms of organization, is to turn 150 years of international revolutionary working class theory and practice on its head.
Conclusion
The Menshevik position about the “fullest development” of capitalism being a necessary condition for the launching of the socialist struggle finds echoes in India today with the insistence on the development of the “most thorough-going and broad-based” capitalism being the precondition for initiating the socialist struggle. While it is hardly surprising that such a position finds political expression in inveterate “tailism”, what really is rather more difficult to believe is the accompanying ahistorical rhetoric of “different” capitalisms. It almost seems to have been asserted that we can choose among the different varieties of capitalisms being offered by history, limited only by our powers of imagination. Which one do you want comrade, history seems to have asked? Well, the social democrats answered, we want the one which is technologically progressive (leads to the fullest development of the productive forces) and also looks after the welfare of the workers and peasantry (through social reforms and huge expenditures in health and education and nutrition). Does the march of history and the development of the structural contradictions of global capitalism at the beginning of the twenty first century afford us the this luxury, this luxury to choose between capitalisms, between good and bad capitalisms? One is reminded of how Marx had chastised Proudhon in The Poverty of Philosophy for wanting capitalism without it’s socio-economic ills. The social democrats in India seem hell bent on committing the same mistake all over again.
References
Carr, E. H. The Bolshevik Revolution 1917-1923, Volume One. The Macmillan Company. 1950.
———— The Bolshevik Revolution 1917-1923, Volume Two. The Macmillan Company. 1952.
Foran, J. Taking Power: On the Origins of Third World Revolutions. Cambridge University Press. 2005
Lenin, V. I. Collected Works. Fourth Edition, Progress Publishers. 1965 (various volumes).
Marx, K. Address of the Central Committee to the Communist League. March 1850, in On Revolution, The Karl Marx Library, edited and translated by Saul K. Padover. McGraw-Hill Book Company. 1971.
Skocpol, T. States and Social Revolutions: A Comparative Analysis of France, Russia and China. Cambridge University Press. 1979.
Zinoviev, G. History of the Bolshevik Party. New Park Publications. 1974 [1923].
Zizek, S. (editor), Revolution at the Gates: A Selection of Writings from February to October 1917, V. I. Lenin. Verso. 2002.
Posted by Deepankar Basu July 7, 2007 at 1:49 pm in Economic Notes, Economy, India, Labour
In an article in the Business Standard a couple of months ago, economic commentator T N Ninan pointed to some of the important emerging trends in the Indian economy, what he called the “mega trends”. In his words, these trends deserve to be called “mega trends” because they “cannot easily be reversed, have large ripple effects, and … therefore will define the future”. While these “mega trends” are important for throwing up interesting empirical regularities, these can be equally well, if not better, understood within a Marxist paradigm, a paradigm built on looking at reality from the perspective of labour. Adopting the perspective of labour is important for another reason: it allows us to see the incompleteness, the one-sidedness of bourgeois economic analysis. It is only by complementing Ninan’s “mega trends” with some important but neglected trends that are often invisible to bourgeois economists (which I merely point to at the end) that we can get a better understanding of the evolution of Indian economy and society.
The first trend – “acquiring of scale” in Ninan’s words – refers to the growing “concentration and centralization” of Indian capital, a process that inevitably accompanies the development of capitalism. The growth of concentration and centralization is leading to the much talked about growth of “self-confidence” of Indian capital, buttressed no doubt with incursions into foreign territories. As Ninan points out, Indian capital was acquiring “three overseas companies a week, through 2006.”
The second trend – “spread of connectivity and awareness” according to Ninan – refers to the technological development accompanying the growth of capitalism; Ninan limits himself to the technological developments in the communications sector but it can easily be extended to other sectors of the economy too. But there are several important reasons to focus on the transportations and communications sector. First, an increasing efficiency of communications and transportations is essential for a smooth and efficient completion of the numerous “circuits of capital”; the increasing volume of surplus value being generated in the economy needs well functioning circuits of capital to be realized into profit. Second, technological development of the communications technology, especially information technology, is important for the establishment of the networks through which finance capital exerts its influence over the economy. Third, and related to the earlier, is the necessity of swift and reliable communications to support all the processes that facilitates the “concentration and centralization of capital”.
The third trend – “the growth of the middle class” in Ninan’s analysis – if put into proper perspective, refers to two things: (1) the increasing inequality that inevitably comes along with the growth of capitalism, and (2) the changing nature of the Indian working class. What Ninan refers to as the “middle class” is really the fraction of the Indian working class (though it does not want to see itself as part of the working class) that acquires high wage employment in the “leading” sectors of the economy by acquiring skills useful for capital.
The fourth trend – what Ninan calls the “growing problems of growth” – refers to the serious environmental problems created by a regime dominated by the logic of capital accumulation. As the problem of global warming caused by increasing concentrations of greenhouse gases in the Earth’s atmosphere has come into focus, it has become clear that cosmetic changes and technological solutions will not be enough to deal with the whole range of environmental problems under capitalism. What will be required is a wholesale, radical socio-economic transformation, in other words, a transition to socialism. It will become increasingly important for radical political forces representing the interests of capital to come to grips with this issue in India and other underdeveloped economies undergoing rapid (dependent) capitalist development.
The fifth trend – “India’s growing openness to the world” according to Ninan – refers to the growing penetration of the Indian economy by imperialist capital; being supplemented by the growing “export of capital” from India to foreign economies, the two together points to the growing “interpenetration” of imperialist and Indian capital and the incorporation of the Indian capitalist class into the global ruling bloc. The penetration of imperialist capital underlies the oft-forgotten “dependent” nature of the capitalist development in India, a capitalism which cannot, almost axiomatically, benefit the majority of the population.
The sixth trend – what Ninan sees as “the continuing dominance of youth” – refers to the demographic backdrop of capital accumulation in India. The fact that a large proportion of the population will be part of the workforce (if they manage to get employed at all!) will mean that huge reserves of labour will be readily available for capital to exploit and extract surplus value. It will be a long time before these reserves dry up and increasing wages start eating into the profit rates, a process that seems to have already started in China.
It is not, as Ninan asserts, that these “mega trends” will “define” the future in a mechanical sense; it is rather the case that these trends will define the framework within which the class struggle will unfold. For it is the class struggle which will ultimately “define” the future of India. But even in the sense of defining the framework of class struggle, Ninan’s characterization is inadequate because it leaves out labour from the picture, other than in a marginal sense. How will India’s working class evolve over the next few years or decades? What are the trends, working silently but decisively, that can be observed in the evolution of the Indian working class? To even attempt to pose this question adequately, one will have to look at the agricultural sector of the Indian economy and all the forms of labour associated (directly or indirectly) with it. Ninan, quite remarkably, has nothing to say about the sector of the economy which continues to employ (directly or indirectly) the majority of the working people in India!
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