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Posted by Deepankar Basu July 5, 2007 at 6:21 pm in Economic Notes, Economy, Finance, USA
A view that is very popular among the votaries of capitalism rests on the alleged efficiency of the financial markets of a “well functioning” capitalist economy. Financial markets, it is claimed, provide the prime mechanisms for channeling funds from savers to the most efficient investment projects, thereby increasing the overall efficiency of the economy. Lack of well-developed financial markets are often interpreted as markers of underdevelopment and economic stagnation. That this is not always the case, that financial markets are unusually prone to “irrational exuberance”, that financial booms and busts are part of the regular functioning of financial markets if often forgotten by this fundamentalist viewpoint.
A more nuanced version of this view is marked by a more measured view towards financial markets. Proponents of this view start by asserting that the financial system is composed of two parts: financial markets and the web of interdependent financial institutions. They recognize the fact that financial markets, by themselves, are often unable or unwilling to perform several important functions (like collecting, processing and disseminating reliable information about borrowers; providing liquidity services; offering deposit and check-writing facilities) required for the smooth functioning of an advanced capitalist economy. Hence, they recognize the important role of institutions, especially financial institutions (like commercial banks, insurance companies, mutual funds, etc.), within the architecture of advanced capitalism. But very often they also go on to assert that the financial system works best if left to itself; that government intervention in the financial system creates unnecessary inefficiencies. When confronted with the evidence of endemic instability of the financial system, they argue that crises and problems have led, over the years, to the development of a host of institutions that are capable of dealing with such episodes; it is both unnecessary and undesirable for the State to regulate the financial system, they claim.
A closer look at the history of the financial system in the US – the leading capitalist nation today – will demonstrate that such a view is seriously misleading; the government has always had to intervene to put the financial house in order. In fact one can go further and assert that the financial system cannot properly function without supervision at crucial moments by the State, if not constant supervision. Let me illustrate this with three well-known historical instances when the State had to step in to deal with the endemic instability of the financial system in the US. These historical instances are important, apart from illustrative purposes of this article, for at least two more reasons. One, they are the defining interventions in the financial system of the US; the financial system as we know it today has been largely shaped by these interventions and the institutions created at those moments. Two, they destroy the facile opposition that is often constructed, both by the Right and even some on the Left, between private capital and the State; the State is an institution created to protect the interests of capital as a whole even though, on occasion, it has to act against some capitals (some firms or industries or even some sectors of the economy). These instance demonstrate clearly that even when the State acted against some financial firms or sectors it was doing so to save and strengthen the capitalist system.
The first major instance of government intervention stands at the very foundational moment of the modern financial system in the US. The unregulated banking industry in the US led to massive bank failures in the late 19th century: waves after waves of bank failures where savers lost their deposits and lenders could not borrow to meet their needs; this led the Congress to create the Federal Reserve System (the Central Bank of the US) in 1913.
Within less than two decades we come to the second major intervention: creation of the FDIC. In the late 1920′s, the US economy was into the biggest downturn it had ever faced: the Great Depression. During this traumatic period, there were thousands of bank failures again (along with a huge stock market crash) and confidence in the whole financial system was greatly eroded. The Congress again stepped in to create the FDIC (Federal Deposit Insurance Corporation) which was meant to deal with the problems that the unregulated banking industry could not handle: bank runs.
The third major intervention (also made around the time of the Great Depression) had been to restrict competition in the banking industry (i.e., to force some form of branching restrictions across geographical regions) and also to restrict the areas into which a commercial bank could enter (basically to separate commercial and investment banking to prevent conflict of interest).
The last instance of government intervention is important because over the last few decades, these laws and the supporting institutions have been generally nibbled away at. For instance, the Glass-Steagall Act of 1933 had created a “wall” separating commercial and investment banking; from the 1970s onwards the growing power of finance has been continuously trying to attack and change this very important law. Finally in 1999, the Gramm-Leach-Bliley Financial Services Modernization Act repealed the Glass-Steagall Act!
The effects are already coming to the fore in the form of major banks’ (like J P Morgan Chase’s) involvement in financial frauds and other irregularities (see the Spring 2007 issue of Dollars & Sense). For instance, Chase was one of the banks which had systematically assisted Enron in its accounting frauds. It had also, in its role as an underwriting agent – one of the main functions of an investment bank – sold Enron stocks to the public knowing full well that Enron was in bad shape. This is precisely the kind of “conflict of interest” that the Glass-Steagall Act was meant to take care of. Now that it has been thrown out, we can expect many more instances of such irregularities.
The bottom line is that I do not share in the optimism about the US financial system (which many people seem to harbour), nor do I think that there is any evidence for such optimism. To suggest that the US financial system has managed to take care of the problems of instability is to willfully ignore well-known empirical evidence. Here are a few: the Savings and Loan (S&L) crises through the 1980′s, the wave of bank failures in the late 1980′s, the stock market crash of 1987, the LTCM scandal in 1998 (when the Fed had to step in to bail out a major financial firm), the dotcom bubble and bust, the imminent meltdown in the sub-prime mortgage market …one could go on and on; but let us look a bit more closely at only two of these well-known episodes of financial trouble: the LTCM fiasco and the sub-prime mortgage meltdown currently underway in the US.
LTCM (Long Term Capital Management), a very famous financial firm of the late 1990s in the US had been feted by Wall Street as one of most technologically sophisticated financial firms in existence; after all it had offered close to 40% annual returns for two years in a row and had towering figures from theoretical finance among its founding members. It was a “hedge fund” formed in 1994 and had, among its founder member two Nobel laureates in Economics: Myron Scholes and Robert Merton. Within four years LTCM was on the verge of collapse! More details about the the rise and fall of LTCM can be found here (there are lots of useful references at the end of this article; among others, there is a very nice PBS documentary on the whole episode which is worth watching.)
A little note about “hedge funds” might not be inappropriate at this point. A “hedge fund” is, to be brief and simple, a financial institution which pools the money of a few very rich individuals and then invests it around the world to make huge profits. Membership to hedge funds is not open; it’s stocks don’t trade in the financial markets; it is always very secretive about how it invests and also about who its investors are. Usually the smallest amount of money that is required by an individual to become part of a hedge fund (i.e., an investor who is one of the many whose money has been pooled into the hedge fund) is $1 million. In most cases, it is much higher. If we look at hedge funds from the point of view of ordinary citizens, we cannot escape the well-known (and increasingly well-recognized) fact that they are notorious for creating instability in financial markets, especially in the low and middle income economies. Their huge size and ability to move funds very rapidly gives them undue power and influence over small and medium economies (now even large economies are facing the music of hedge funds), whose macroeconomic stability is severely jeopardized by their investment strategies.
Coming back to the stunning LTCM collapse, it is important to remember that the Federal Reserve Bank of New York had to step in to arrange credit for its bailout. If the Fed had not intervened to bail out the tottering giant, it might have led to a asset price deflationary spiral leading to a string of failing firms and lost jobs and lost output and macroeconomic instability. For the purposes of this essay, it is merely necessary to note that the financial system could not deal with this problem on its own!
Let us now move on to the second story, a story that is still unfolding: the sub-prime mortgage lending crisis in the US. Referring to the sub-prime mortgage meltdown that is currently underway in the US, a recent report by the Centre for Responsible Lending has estimated that more than 1 million low-income families have lost their homes on net (i.e., after accounting for those who have gained home ownership) over the past nine years. Have the banks and financial firms that created this crisis lost much? It is doubtful whether the banks originating the mortgages, the focus of all the attention in the mainstream press, have really lost anything.
Let me remind readers that the “sub-prime” mortgage meltdown refers to the market for mortgage loans (i.e., loans for buying real estate) supposedly for low-income households without good credit histories. The rule of the game, as it evolved over the last decade, was that the house that is bought with the mortgage loan is used as collateral for the loan so that whenever a family fails to make a single monthly payment (there might be a little variation on this), it leads to “foreclosure” and the bank that had made the loan takes possession of the house to recoup its losses.
But why the term “sub-prime”? The attribute of “sub-prime” comes from the fact that most of these loans made on this market are at above-average (much above the market interest rate for mortgages) interest rates and at very onerous terms; the term contrasts this market with the “prime” mortgage market where loans are available at much lower interest rates. In most cases, these “sub-prime” loans are made in bad faith because the concerned families are “convinced” of the suitability of high-interest rate and “coaxed” into the loans at unreasonable terms. More often than not big banks use various kinds of methods to consciously keep out low-income families from the “prime” mortgage market (where they might have got loans at reasonable rates and terms); most of these families, needless to say, are either African-American or Latinos. Once, in this way, these families have been pushed out of the “prime” mortgage market and into the “sub-prime” market, the same banks turn into loan sharks and strip the low-income families to their bones. It is, therefore, hardly surprising that many families are unable to meet the monthly payments of the mortgage and lose their house and most of their life’s savings. That is what has been documented by the Centre for Responsible Lending and that is what is creating havoc in the lives of many working-class Americans.
These are but two small instances of the operation of financial system under advanced capitalism; one can very easily multiply them ad nauseum. The evidence, if one cares to look, strongly suggests that the US (or any other capitalist economy for that matter) will have to learn to live with inescapable instability; these episodes are as much part of life under capitalism as are economy-wide business cycles. Of course, under capitalism, the overwhelming cost of these episodes of financial and other forms of instability will be always borne by the working people. Hence, all political formations claiming to represent the interests of the working people must vociferously argue for the regulation of the financial system without taking recourse to the false opposition between the State and capital.
Posted by Deepankar Basu June 2, 2007 at 1:32 pm in Economic Notes, Economy, India
1. The Indian economy is currently undergoing a boom, a moderately long boom for a less developed economy: “between 1999-2000 and 2006-07, the gross domestic product (GDP) in constant prices increased at an average annual rate of nearly 7 per cent. And for the past three years, the economy has been growing at 8 per cent.” This boom is a profit-led boom, where surging profits of the Indian corporate sector is leading the growth in savings and investment. This seems to be a far cry from the general economic “stagnation” in the “semi-colonies” predicted by the classical theories of imperialism. Of course, this growth is accompanied by growing inequality; capitalists are gaining more than workers and big capitalists are gaining more than the small-sector capitalists. This is a situation which had occured in Argentina, Brazil and Chile (and Mexico and Iran possibly) about four decades earlier and continues to this day; this is what has been called “dependent development”: dependent, to take account of the continued operation of imperialism (through various channels) and development to take account of the non-trivial industrial development (as opposed to the earlier periods of general economic stagnation and no industrial development). Would this (the move from semi-colonial stagnation to dependent development) change the agenda for radical social transformation?
2. A mark of the recent trend in the Indian economy are the new economic kings, the new capitalist moguls whose wealth (in purchasing power parity terms) would equal those of the richest in the First World. Here is a typical example of the rising wealth of the new capitalists. It is important to reiterate that these are capitalists and not feudal lords, and they are (or will, in the near future, be) calling the shots in India. Is it not capitalism, dependent capitalism to be sure, that is the dominant mode of production in the Indian socio-economic formation?
3. One area of the Indian economy which is going to see a lot of turmoil in the coming months is the retail sector. Recall that the retail sector directly employs about 8 percent of the workforce; the indirect employment is probably much larger. Most of the “firms” in this sector are what are called the “mom-and-pop” shops; these are small family-owned and managed businesses, often employing very outdated technology (transportation, storage, etc.). Big corporate entities, both Indian and foreign, have already started entering this market which is estimated to be around $250 billion! Two interesting things can be expected to happen here. One, big corporate entities entering and wiping out the mom-and-pop shops will considerably increase the technological level of the retail sector; it will lead to a huge growth of the productive forces. Two, Indian big capital, represented by Reliance, is going to fight for this huge market against the Walmart-Bharati enterprises combine which is a foreign capital led alliance. Given these two facts, how will the revolutionary forces consistently oppose this development while (a) accepting the primacy of the development of productive forces for social transformation and (b) adhering to their anti-imperialist stance.
4. I want to return to Marx’s famous letter to Vera Zasulich in relation to the question of the socialist revolution in Russia. In the draft letter to Vera Zasulich, Marx had specifically mentioned that the Russian peasant commune could be used for the development of a higher form of social ownership and labour, i.e., socialist labour and that defending and deepening the communes should be an express task of the revolutionary movement of the working class. In the preface to the second edition of the Communist Manifesto, Marx and Engels added a crucial condition for this possibility to materialise.
“The Communist Manifesto had, as its object, the proclamation of the inevitable impending dissolution of modern bourgeois property. But in Russia we find, face-to-face with the rapidly flowering capitalist swindle and bourgeois property, just beginning to develop, more than half the land owned in common by the peasants. Now the question is: can the Russian obshchina, though greatly undermined, yet a form of primeval common ownership of land, pass directly to the higher form of Communist common ownership? Or, on the contrary, must it first pass through the same process of dissolution such as constitutes the historical evolution of the West? The only answer to that possible today is this: If the Russian Revolution becomes the signal for a proletarian revolution in the West, so that both complement each other, the present Russian common ownership of land may serve as the starting point for a communist development (Source). ”
If we juxtapose this assertion to the debate about the possibility of building socialism in one country then we come up against an inconsistency. Let me elaborate.
It is well-known that the Bolsheviks gave a call for a socialist revolution in Russia in 1917 with the express recognition that the Russian revolution could only be sustained if it “becomes the signal for a proletarian revolution in the West, so that both complement each other”; the Bolsheviks were especially anxious about the outcome of the German revolution. Thus, both the call for the socialist revolution and the movement for the strengthening of the peasant commune (to be used as a springboard for the construction of a higher form of socialized labour) rested on the hope of support from proletarian revolutions in the West. The Bolsheviks gave the call for a socialist revolution but did not give a call for strengthening and deepening the peasant communes. Why?
5. This is a nice picture of the enduring (and possibly growing) strength of the anti-capitalist strand within the anti-globalization struggle.
Posted by Deepankar Basu May 12, 2007 at 11:42 pm in Agrarian Question, Economy, India
The first thing that probably needs to be clarified in the study of agrarian structure in India (and other parts of the periphery) is to understand agrarian structure as an articulation of various modes of production under which socially necessary labour is being undertaken. The concept of socio-economic formation, as an articulation of various modes of production, but distinct from the concept of mode of production itself might prove useful here. I feel that this is a very important point that is often ignored in much Marxist theorising.
Once we agree to understand agrarian structure as an articulation of various modes of production, several questions immediately arise. One, what are the various modes of production that are articulated in various forms in India today? Capitalist and pre-capitalist modes. That much is clear and widely agreed upon.
The next important question, of course, is this: which is the dominant mode of production in this social formation, in this complex reality formed by the articulation of the capitalist and pre-capitalist modes of production? Which, in other words, is the mode that is dominating the others, shaping the others so as to fulfill it’s own needs of reproduction? Which is the dominant and which is the dominated mode of production? In this regard, the tentative hypothesis that I would like to advance is the following: contemporary Indian reality suggests that the capitalist mode of production is the dominant mode. It is capitalism, decidedly of a dependent variety, that is calling the shots in India today. All vestiges of pre-capitalist modes are articulated to the capitalist mode and are serving its needs in various ways. But it would be a mistake to allow the vestiges of these pre-capitalist modes to define social reality in rural India, its agrarian structure.
The question that will naturally follow is this: how to explain the stagnation in Indian agriculture? How to explain the rising rural distress? This is an extremely important question, but I don’t think it is necessary to take recourse to semi-feudalism to explain rural stagnation and distress. Dependent capitalism, of the type that has developed elsewhere in the periphery of the world capitalist system, is precisely a capitalism which entails stagnation, pauperisation and distress for the majority while a small minority grows at a very high rate. That has happened in Brazil, Argentina, Chile and is now happening in India. This is another tentative hypothesis that I would like to advance.
A very close friend of mine, who has been studying agrarian relations in Punjab for some time now drew my attention to three very important characteristics of rural reality in Punjab. These are: (a) the intrusion of ideological factors like “social pride” into the process of mechanization of agriculture (he informed that the possession of tractors in contemporary Punjab is more a matter of “social pride” of the peasantry than any capitalist incentives arising from production conditions); (b) the existence of a class of middlemen who procure agricultural product from peasants and also function as money-lenders, thereby givng rise to partially interlinked markets; and (c) the widespread use of migrant labour in agriculture.
What are the implications of these three characteristics for our understanding of agrarian structure in contemporary India? I would tend to interpret these three characteristics as the many factors, among others, which reproduce capitalist stagnation; I do not see this as providing evidence of the presence of semi-feudal relations in rural India.
The question that immediately came to mind regarding the first charateristic is this: What is the material basis of the “social pride” that comes from the ownership of tractors? An answer suggests itself almost naturally. The tractor manufacturer would gain enormously from the widespread existence of such “social pride”. Let us recall several campaigns by the local capitalist class (for example the “hamara Bajaj” campaign) where ownership of scooters and motorcycles and four-wheelers and tractors are given other, social meanings (like national pride, etc.)? Could something like that be in operation in Punjab too?
Existence of a large class of middlemen is important but does not really lend support to any semi-feudal thesis. The class of middlemen, to my mind, are representatives of mercantile capital; a class which makes profit by buying cheap and selling dear. It is important to remember that they have come up under the shadows of a partially paternalistic State and the pressure of rich and middle peasants for minimum price policies. Through them mercantile capital is getting accumulated in rural India. The fact that the credit market is partially interlinked to the product market through this class reminds me of the “putting out system” during the early phases of the industrial revolution in England. But, this system, I am told, has made a comeback through various kinds of “contract farming” in other parts of India too. For instance, Pepsi Co, HLL, Procter and Gamble and many other companies often do the same. They provide credit and other inputs to the farmers and the contract is that they will buy the product at pre-arranged prices. So, even though markets are getting interlinked, it is in a context that is very different from those studied in the early 1970′s by Amit Bhaduri and others. In this case, the capitalist character of many of the participants is beyond all reasonable doubt. So, instead of understanding this as an instance of semi-feudal relations of production, it is probably more helpful to see this as the specific manner in which the articulation to dependent capitalism takes place.
The importance of migrant labour, as my friend pointed out, can hardly be denied. But as I have suggested earlier, while it is important to understand the articulation of modes of production, it is equally important to identify the dominant mode? Moreover, the existence and growth of migrant labour, footloose labour according to Jan Breman, also seems to suggest that the various kinds of bonds that tied down labour to a particular plot of land or village or area is loosening. Doesn’t that gradually erode the semi-feudal basis of power in the rural areas?
Another related question that often comes to mind is this: are big and powerful feudal landlords left in India today, other than in small pockets? Does social, economic and cultural power in rural India reside with the class of feudal landlords? I have serious doubts that it does. I think, instead, that the social and economic power of the landlord class has been largely eroded. Rural power now rests in the hands of the middle and rich peasants, not in the hands of landlords. To a minimum that seems to be the case in large parts of India: Punjab, Haryana, Western UP, TN, Andhra, Karnataka, Kerala, West Bengal, Gujrat, Maharashtra. Therefore another question arises immediately: does this define the character of rural India or do the remnants of semi-feudal power in pockets of Bihar, Orissa, Eastern UP, MP, Chattisgarh, Jaharkhand define rural India?
Posted by Deepankar Basu March 26, 2007 at 11:40 am in Economic Notes, Economy, India
Dipankar Basu
The debate over economic “reforms” in India has been going on for quite a long time now. This long and heated debate has been centred around the effects of what has been called “economic reforms”, a sharp change in the policy regime governing the Indian economy. It might be useful to recall that the policy regime in India gradually started changing right after Rajiv Gandhi came to power towards the end of 1984; of course the change was considerably accelerated after Manmohan Singh, the current prime minister, became the finance minister in the Congress government in 1991. Since then there has been no looking back; whether it is a coalition government led by the centrist Congress or led by the right-wing Bharatiya Janata Party (BJP), economic reforms have continued apace. In fact, consensus about the necessity and desirability of reforms is evident across the whole political spectrum, ranging from the right-wing BJP to the social democratic communist parties, CPI and CPI(M). Of course there are subtle differences in emphasis and speed of implementation, with the social democrats trying to play an oppositional role at the federal level while adopting those same policies in the states under their rule, notably West Bengal. It is as an attempt to forcefully impose this policy regime on the people of West Bengal, where a broad coalition of social democratic forces has been in power for the last three decades, that we must try to understand the recent brutalities of the State in Singur and Nandigram.
The main thrust of the policy change comprising “economic reforms” was a move towards according greater role to market forces in the economy and came in many guises. For instance it meant the lowering most tariff and non-tariff barriers to promote the trade of goods and services across Indian borders; it meant liberalizing many legal procedures related to investment, corporate taxation, trade, commercial banking, stock market activity and most importantly the hiring and firing of labour; it meant the disinvestment of public assets like public sector units, which in most cases meant selling off public assets built with tax receipts over the years at below-market prices to private capital; it meant an uncritical adoption of “fiscal fundamentalism”, i.e., paying especial attention to the balancing of the budget or at least making some serious efforts at reducing the government budget deficit; it meant the gradual entry of foreign capital into the Indian economy (both as FDI and as portfolio investment); it meant a gradual retreat of the State from the provision of social services like health and education and also meant the simultaneous encouragement of private capital to enter into these areas and many more similar changes. Compared to even the pseudo-socialist policy framework that had been established after the British departed in 1947, the new policy regime meant a massive swing in the direction of unfettered capitalism. And this could not but generate debate, vigorous and heated debate.
The debate centred around the effects of such changes; and since the effects of these policy changes would become clear only after some years, the debate almost wholly concerned itself with predictions, with the future. The crucial question was whether this new set of policies would benefit the economy as the proponents asserted or would lead to disaster as the critics pointed out. Ranged on both sides were the who’s who of the Indian economics and policymaking community. Arguing for the reforms were noted economists Jagdish Bhagwati, T N Srinivasan, Montek Ahluwalia, Manmohan Singh, Arvind Panagariya, Bibek Debroy, Surjit Bhalla, Shubhashish Ganguli and many others; on the other side of the table were equally distinguished economists like Prabhat Patnaik, C P Chandrashekhar, Jayati Ghosh, Praful Bidwai, Ashok Mitra, Amiya Bagchi and others.
Most critics of the economic “reforms” had argued that the adoption of the above set of policies would be disastrous for the Indian economy. They had argued that opening up the Indian economy to trade would lead to “deindustrialisation”, i.e., foreign goods would flood our markets and displace locally produced goods leading to closing down of local industries and thus increasing unemployment in the Indian economy. This, they had argued, would lead to a fall in the growth rate of the Indian economy (once the pent-up consumption expenditure boom was over) and lead to a fall in the economy’s overall productivity. They had argued that the poverty rate as measured by the head count ratio (the proportion of the people whose annual consumption expenditure fall below the poverty line) would increase and that income and wealth inequality would also increase dramatically. They had argued that the investment rate in the Indian economy would drop and lead to a shrinking of the capital goods sector. The proponents had, on the other hand, argued exactly the opposite; they had argued that the new policy regime would lead to growth in the economy and reduction of poverty.
Fifteen (or twenty if we start from the mid 1980s) years down the line, the evidence is at best mixed; if anything the empirical evidence seems to bear out the proponents’ claims more than the critics’. The growth rate in the Indian economy (as measured by the growth rate of the per capita income) has certainly increased over the last two decades; opening up the economy has not led to deindustrialisation (in fact our exports have increased as also our imports). The Indian economy does not have a large current account deficit which means that we have not been flooded with foreign capital. In fact, over the last few years, outward FDI from India has increased rapidly and in 2006, the Indian economy was a net outward FDI originator. Savings and investment rates have also dramatically increased. And probably most importantly, the poverty rate has consistently declined over the last twenty years; the rate of decline had itself declined in the nineties before picking up again in the last six years. But along with this we also have increasing income inequality, acute rural distress, a degrading environment and most importantly a stagnation in some of the most important indicators of well-being (like the infant mortality rate, the maternal mortality rate, the life expectancy at birth, the primary and secondary enrolment rates and many others).
The process of economic growth and development is more complex than either the well-known proponents or the critics would have us believe; both present only half-truths. When proponents of “reforms” ask us to look at the facts, they want us only to see that the poverty rate (as measured by the head count ratio) has declined; they do not want us to see that this decline has not been accompanied by an improvement in the measures of social well-being, they do not want us to understand the reasons behind the acute rural distress that has led to farmer suicides on such a large scale. The overemphasis on economic growth and the head count ratio by the proponents tries to discount years of research that has drawn our attention to the inherent limitations of this rather narrow measure of development and poverty.
Equally dishonest, I feel, are the intellectuals associated with the official, social democratic left. Faced with evidence that goes against their earlier pronouncements, they continually shift their stands without as much as acknowledging possible problems in their formulations. Notice how they have shifted their discourse on poverty: from poverty decline they have gradually moved onto the rate of poverty decline. Recall that most of them had started the debate by asserting that poverty would increase; once empirical evidence shows that it has not, they have started talking about how the rate of decline has itself declined! Recall also that they used to never focus attention on the indicators of social well-being that they find so important now; issues like education and health were looked at with little more than derision, matters for the “development economists” and not for radicals. Radicals indeed.
To put the whole debate in proper perspective it is important to realize that at bottom, the process of economic development is broadly a matter of increasing the productivity of social labour; and this, we know since Adam Smith and the classical political economists, can be best achieved by increasing the division of labour. Institutions which can support an extended division of labour will lead to increasing labour productivity and thus create grounds for general prosperity in the economy. I think there is much of relevance in classical political economy that can shed light on current debates and let me make a small digression into the writings of Adam Smith. Duncan Foley’s recent book, “Adam’s Fallacy: A Guide to economic Theology”, contains an extremely lucid, well-informed and critical introduction to classical political economy and I will borrow briefly from Foley’s account to motivate the point that I want to highlight.
What makes a nation prosperous, asked Adam Smith at the beginning of his inquiry into the causes of the wealth of nations. His answer is profound because of its stark simplicity: the extent of the division of labour. Not the abundance of natural resources, not the amount of precious metals like gold and silver, but the extent of the division of labour within a country determines the potential prosperity that it can offer its citizens. Behind this assertion lies the understanding – shared by all classical political economists – that the ultimate source of wealth is the labour that goes into the process of social production. The extent of the division of labour, by determining the productivity of that labour, ultimately determines the potential wealth of any nation.
In Smith’s account, the division of labour refers to “the breaking down of useful production into a series of separate tasks, each of which can be accomplished separately from the other”. It is important to realize that Smith sees the division of labour occurring at two very different levels, one at the level of the enterprise and the other at the level of society as a whole. The first, which Smith calls the detail division of labour, refers to the process by which production within a firm is broken up into separate tasks; it is the detail division of labour that finally creates the conditions for the introduction of machinery into the production process. But the division of labour also occurs at the aggregate or societal level; this is what Smith refers to as the social division of labour, which is the process by which “parts of a complex production process can be separated into different points of production, which may be located in different firms, or even different geographic regions”.
Smith’s account of the causes of the wealth of nations is completed by positing a positive feedback loop between the division of labour, labour productivity and the extent of the market; this link, when and where it can take hold, operates as a positive feedback loop. Widening extent of the market (i.e., growth in effective demand) supports an increasing division of labour, which increases the productivity of labour, leading to falling prices and rising real incomes. Growth in real income increases the extent of the market in turn, completing the virtuous spiral.
Notice how, in narrating this story of economic development, Smith the political economist has almost imperceptibly melted into Smith the theologian of capitalist social relations; this is the critical point that Foley helps us understand. For hidden within his “objective” description of the workings of a capitalist economy are two implicit value-laden propositions. First, that the process of technological progress and economic growth – the virtuous spiral of economic development – is beneficial for all members of society, i.e., it is autonomous and class-neutral: how else could it be morally justified? And second, that the defining institutions of capitalism – private ownership of the means of production, and markets – are the only ways to support a society-wide, complex division of labour with its attendant benefits in terms of high labour productivity.
To my mind, this is where the critique of economic “reforms” should really be located, not where the social democratic left has placed it. If India manages to establish the institutions of capitalism properly, then there is no doubt that this can lead to technological progress and economic growth. This growth will also lead to a decline in the poverty rates, much like that has happened in Korea and is currently happening in Vietnam or China. If this is true then why oppose economic reforms? This is a legitimate question which the social democratic left does not even attempt to answer. To my mind, the opposition to economic reforms lies in opposing the claim that capitalism is the only way to support an economy-wide complex division of labour. It is to take account of the cost of economic development alongside the benefits. It is to assess the class-nature of these costs and benefits in an already class-divided society. We must ask ourselves: will we oppose a development path that reduces poverty rates but only at the cost of increasing inequality? Economic development through capitalist industrialization (whose logic is, what Marx famously called, “Accumulate, accumulate! That is Moses and the prophets!”) will lead to dislocations of millions of lives in the medium and short run, though in the long run, the economy-wide poverty rate might go down. The question really before us is this: are we ready to ignore these medium and short-run costs for the long-run benefits which might materialize only in decades or even longer? Are we ready to accept a dispensation where the costs of economic development are disproportionately borne by those who will rarely, if ever, get to enjoy the benefits of that development?
The author is associated with Sanhati (www.sanhati.com), a solidarity forum for resistance to neo-liberalism in West Bengal, India.
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