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
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.
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.
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).
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.
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.
The recent financial crisis and Great Recession have been analysed endlessly in the mainstream and academia, but this is the first book to conclude, on the basis of in-depth analyses of official US data, that Marx’s crisis theory can explain these events.
Marx believed that the rate of profit has a tendency to fall, leading to economic crises and recessions. Many economists, Marxists among them, have dismissed this theory out of hand, but Andrew Kliman’s careful data analysis shows that the rate of profit did indeed decline after the post-World War II boom and that free-market policies failed to reverse the decline. The fall in profitability led to sluggish investment and economic growth, mounting debt problems, desperate attempts of governments to fight these problems by piling up even more debt – and ultimately to the Great Recession.
Kliman’s conclusion is simple but shocking: short of socialist transformation, the only way to escape the ‘new normal’ of a stagnant, crisis-prone economy is to restore profitability through full-scale destruction of existing wealth, something not seen since the Depression of the 1930s.
About The Author
Andrew Kliman is Professor of Economics at Pace University, New York. He is the author of Reclaiming Marx’s ‘Capital’: A Refutation of the Myth of Inconsistency and many writings on crisis theory, value theory and other topics.
Industrialisation is understood narrowly in the sense of manufacturing and broadly in the sense of the application of modern science and technology to the transformation of raw materials from nature. It is necessary for national development, as the economist Gavin Kitching and others argued decades ago. Industrialisation adds value to unprocessed goods extracted from nature and thus increases society’s income. Often owners of land – peasants – do not earn more – or do not earn much more — than those who work in industry as wage labourers. Industrialisation makes possible the production of a vast range of goods, which are directly used by people: clothes, materials required to build houses, traditional and western medicines, consumer durables, cultural items such as books and music instruments; the different types food that go through the manufacturing process, and so on. And, industry indeed produces the means of production necessary in both farming and industry itself. Industrialisation holds out the possibility of ending want and material suffering. It provides employment to the increasing population, including through forward and backward linkages. It makes it possible to reap scale economies and specialisation in ways not possible in agriculture. In part because of the above, industrialisation increases labour productivity, one of the fundamental indicators of progress, prosperity, and economic development in the society at large. Industrialisation breaks the mutual isolation of producers: this happens as they now work in great numbers in large cities and towns. Their geographical concentration will potentially allow them to fight for justice and equality in society, both on their behalf and on behalf of other oppressed groups. Industrialisation, connected as it is to science, promotes a culture of rational thinking and can potentially undermine the basis for superstitious and obscurantist ideas and practices. Given these and many other advantages of industrialisation, the Left – at least the Marxist left — cannot be opposed to industrialisation (although sections of the postmodern/populist Left are, as industrialisation is seen by them as a sign/carrier of modernity that supposedly destroys an authentic pre-modern culture). The question is: what form of industrialisation should the Left endorse in theory and practice? What happens when, for example, a proposed SEZ (special economic zone) displaces thousands of peasants? Should industrialisation be endorsed under this situation?
To answer this question, one may start with agriculture. Land is the most important means of production in agriculture, at least at the current stage when farming is relatively less capital-intensive. Fertility of land is a product of natural forces as well as human investments. It is normally the case that human investments in land to raise land fertility happen closer to existing centres of population and commerce than away from these. Fertile tracts of land therefore are generally located closer to existing centres of population and commerce. Now, owners of industry need also land. But their need for land is different. They need to locate their factories on: land is not used as an input in the way it is used in farming. And in a market economy, they need land in a specific location: industry tends to be located closer to existing centres of population and commerce for the reason that greater profits are made possible by greater geographical accessibility. Therefore, the fight over industrialisation often becomes a fight between owners of industry and owners of land (including peasants). This fight is over not just an absolute piece of land but over its location.
To be able to understand the on-going struggles over industrialisation, we have to carefully distinguish between industrialisation per se which is necessary in all modern societies from its various historically specific forms, and we need to also distinguish between various forms of struggle over industrialisation.
There is a strong logic to locating industry on the land which is not currently cultivated or irregularly cultivated, in relatively less accessible locations and away from the locations of fertile land on which peasants are currently dependent on or which may soon be used. Why? Firstly, as mentioned above, industry does not need fertile land as an input. Location of a factory on or close to a fertile land destroys natural fertility of soil which is almost impossible to manufacture in industry. It is indeed a great social cost to use a fertile land for industrialisation which does not need it. Secondly, forcing the industry to locate in these areas (e.g. relatively less accessible areas, away from fertile land) will result in the development of new means of transportation and communication (which will also create jobs). Industrialisation in these less accessible locations will also give an impetus to agriculture. It is unfortunate that when industries could be located in more remote locations on land that is relatively less fertile, they are being located on currently cultivated fertile land. This must be fought against. This is one form of struggle over industrialisation.
If, however, a fertile land currently being cultivated must absolutely be used for an SEZ — and whether this must be the case should be democratically decided and not decided by business — several conditions must be laid out. The value of the land as a compensation to the family must be determined in relation to what the value of the land would be after the industries have come up. Under no circumstances must the living standards of the families losing the land and the families losing access to employment on that land (farm labourers, tenants) be allowed to be worse than what they were before the change in the use of the land. Indeed, because industrialisation will make possible greater production of wealth and because this is possible only by displacing the people who currently occupy the land and depend on its use, it must be an absolute precondition of displacement that their material and cultural needs (adequate food, clothes, shelter, education, health care, etc.) are satisfied (including by giving employment to at least a single person from every affected family with a living wage in the industry) and that environmental sustainability of the place and nearby-places is maintained. Investment must be made in the lives of the people who are affected before the investment is made in the SEZ itself. This will not happen automatically. This requires democratically mobilised struggle. This is the second form of struggle over industrialisation.
Peasants as peasants have been involved in heroic battles over dispossession from their land – in Bengal, in northern Orissa, in Maharashtra, and so many other places. This is not the decisive battle against the industrialist class (domestic or foreign), however. The decisive battle against it cannot be, and will not be, fought by peasants as property owners against dispossession, although local and temporary success is possible. The battle against unjust dispossession can only be successfully fought by urban workers in an alliance with peasants and rural workers. Note also that the issue of peasants being separated from land is not a single separable visible act of a group of industrialists, backed by the state. Given, for example, the high costs of farm inputs which come from the industry and given the decreasing prices of farm products from which industry benefits, millions are going into debt, and to clear their debt, peasants are selling their land. Many are leasing their land to better-off farmers, including those who enter into contract with industrialists, domestic and foreign, to produce farm products for industrial processing. There is therefore a potential site of struggle against this insidious form of dispossession from land. The industrialists who set up an SEZ by displacing peasants from land and the industrialists who benefit from high prices of goods sold to peasants which contribute to their economic unviability and separation from land are both members of the same family. The fight against high prices of industrial goods used by peasants is therefore an important part of the fight for a particular form of industrialisation, one that would seek to remove the differences between peasants and industry and the relations of oppression between them.
There is still another form of struggle over industrialisation. Peasants turned into the proletariat in the SEZs, in newly industrialising areas – whether located on fertile land, displacing peasants or in remote locations — will and must fight against the monied class, initially for better wages and working conditions. One may respond by saying that the SEZ framework of industrialisation does not allow for the working class organisation. But then who said that the SEZ must be a necessary form of industrialisation? Or if it does, who said that an SEZ – understood as an industrial cluster — must be one where workers are to be alienated from their democratic right to organise? If business has the right to make money, then surely, and in the interest of democracy, workers have the right to organise to demand a decent life? This is the fourth form of struggle over industrialisation, the struggle that connects workers of different industrial clusters and cities politically and that demands that industrialisation must be of a particular form such that those who do the work must be fully able to meet their social and cultural needs. An SEZ, an industrial project is not based on a one-time act of separating people from their land and livelihood. Much rather, the particular form of industrialisation that is in question is based on a continuous separation: separation of people from the product of their labour, from their blood and sweat. It represents endless money-making at one pole and limitless misery at another. This form of industrialisation does not just produce things that are of potential use. It reproduces an invisible relation of separation of masses from their lives, a relation between them and those who control their lives at work (and outside). So because separation of people from their land creates a ground for the second form of separation, the struggle against the former must be connected to the struggle over the latter, and can only be fully successful if it is connected that way.
Protecting the peasants does not necessarily mean protecting the peasant property. If industrialisation can better the conditions of peasants (i.e. outside of farming), perhaps ‘sacrificing’ their property to make room for industrialisation can be favourably considered. Everyone must be provided with an opportunity to live a life with dignity. Whether it is in industry or farming should, ordinarily, be beside the matter. But there is an ‘if’, as in ‘If industrialisation can better conditions of life of peasants…’. Industrialisation, whether led by state-capital or private capital has not done much for millions of peasants. And it won’t unless it is a site of contestation.
The current struggles around SEZs and displacement appear to be a little narrow. They are often too defensive. The message of these struggles seems to be: ‘don’t take away our land, leave us alone (to our misery)’. The struggle against displacement should be a part of larger family of struggles, i.e. struggles over industrialisation as such. This is because the objects of struggle are objectively inter-connected. The fight against SEZs must be a fight against a particular existing form of industrialisation which leads to double dispossession: political acts of dispossession or primitive accumulation and dispossession through market mechanisms (rising prices of industrial goods leading to debt). A part of the fight should also be within SEZs (and other industrialised areas). Seen in another way, the fight against SEZs and displacement is a fight for a certain form of industrialisation, which, in turn, is a fight for (deepening) democracy and for the satisfaction of social, cultural and ecological needs of those who are displaced to make room for industries, those who lose land because of rising prices of industrial goods, and those who work inside the industrial areas.
Raju J Das is an Associate Professor at York University, Toronto, Canada. Email: rajudas@yorku.ca
Can the Maruti management’s stubbornness be explained only by its unwillingness to allow workers to have their union? This seems doubtful. Unions in India in themselves do not pose such a grave threat for managements. There must be something more to it.
Rather, it reflects a bourgeois resoluteness to bring the long pending demand for institutionalisation of the changes in the labour regime to the centre-stage of policymaking. Changes in the labour regime – casualisation and contractualisation that neoliberalism intensified have not yet been codified completely, which frequently puts managements in legal predicaments, allowing unions to pose ‘legitimate’ demands. A recent Supreme Court judgement which ordered regularisation of contract labourers employed in airports demonstrates the lag between the industrial reality and the legal framework.
In the past decade, the agenda of labour reforms could not be pushed ahead partly because of political compulsions (UPA I was supported by the left parties) and partly due to economic conundrum (the global crisis) in which the UPA regimes found themselves in.
The Maruti management’s determination is not coming from its own competitive need; rather it is representing the general will of the bourgeoisie in India. Not anyone could have acted in this manner. The central role of the automobile sector in the present phase of capitalist development and Maruti’s overwhelming leadership in this particular sector puts it at the helm of the bourgeois class.
At least, it is hard to deny that this sector has been in the forefront of demanding labour reforms. The recent statements from the Automobile Component Manufacturers Association of India (ACMAI) and the Society of Indian Automobiles Manufacturers (SIAM) testify this. These associations have been emphasising that labour reforms are crucial for the growth in the automotive industry.
“The rigidity in labour laws has led companies to increasingly resort to outsourcing and contracting of labour. To be very precise, the need of the hour is flexible labour reforms,” General Motors India vice president P Balendran had said.
SIAM Director General Vishnu Mathur said the law should give “flexibility” on taking disciplinary actions even against a single person.
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.
At the end of 2010, tens of thousands of university students have demonstrated in central London and all over university campuses in the UK, against the coalition government’s proposals to raise tuition fees up to 9,000 pounds. Government and Media coverage of the protests has focussed primarily on two factors – the violence of a minority of protestors and the apparent ‘privileged’ profile of a few student protestors. ‘Rich rioting students’ was just one of the headlines describing the demonstrations. A panellist on BBC’s Question Time described protestors as ‘just a bunch of middle class students’. Michael Gove, the Education Minister, defending the planned increase in tuition fees posed the question: ‘Is it fair to ask a miner to subsidise the education of someone who can go and become a millionaire?’ The irony of this analogy can surely not be lost on those who remember how brutally Gove’s Conservative Party, in its previous incarnation, destroyed the heart of British working class mining communities.
One of the most passionate, but misguided, commentaries on the recent student protests comes from Julie Burchill (the Independent, 16 December), who made a plea to the public to ‘spare us these pampered protesters who riot in defence of their privilege’. Focusing on one student, Charlie Gilmour, who has been singled out by almost all the British media because of his connection to a famous rock star, Burchill vents her anger at so called ‘middle class’ protestors at the same time as dismissing university education as a wasteful time of ‘boozing and bullshitting funded by the taxes of people who had the actual gumption to remove themselves from the playpen of education and get a job as soon as legally possible’. She goes on to suggest that for many working class youth, university education has made little difference to their prospects of getting a job.
Burchill is right to question the success of government-sponsored schemes such as widening participation which critics argue has done little to equalise educational outcomes. All the research suggests that while working class students are more likely to attend university than they did 10 years ago the class gap has not necessarily diminished. Working class students are more likely to attend newer universities, to be part-time students and to study for more vocational subjects. But to dismiss university education for the masses as completely irrelevant is surely wrong. Burchill is also wrong to dismiss the current protests as entirely middle class-led. The fact that some students from middle and upper class families join the student protest does not make the whole student protest an action of the privileged few in defence of their privileges. University students, whatever social class their parents are from, historically tend to act together as ‘students’, and for most part for progressive causes as in the case of the 1968 student protests. At first in 1968 too, the governments and media also sought to portray the student protests as work of radical students and small groups of middle class troublemakers.
The protests over the last few weeks have seen large numbers of working class students (some of them school students) protesting because it is they who have the most to lose from the proposed public spending cuts. Further, to get so hung up on the notion of a so-called middle class-led protest serves to support Gove’s and the coalition government’s attempts to create an ideological standpoint, presumably on the side of the ordinary working people, from which position to launch a wholesale attack on all the social and economic achievements of the previous generations, like the universal child benefit, housing benefit, disability benefits and similar other measures.
The current representation of the protestors as middle class serves a deeply ideological and manipulative function of deflecting attention away from the stark realities of the public cuts and their real causes. Many people who oppose the cuts simultaneously accept the argument that there is no alternative but to sacrifice education and other public services in order to save the economy. Further, a large section of the British public and media appear to have accepted the line presented by the government that the total package of cuts worth £128 billion by 2015-16 was ‘unavoidable’ because of previous administration’s careless spending, and almost self-made huge deficits. Until the financial crash of 2008, however, the Labour governments had succeeded in keeping national debt below the 40 percent of GDP target that they set themselves. In 2006/07, public sector net debt was 36.0 percent of the GDP. In 2008, it rose rapidly primarily because of ‘financial interventions’ to bailout of Northern Rock, RBS and other banks, because of lower tax receipts, and because of higher spending on unemployment benefits, all caused by the global recession. The current deficit was caused primarily by the recession not by previous administration’s pre-crash careless spending. It currently stands as 63.7 percent of National GDP, and was projected to peak at 74.9 percent in 2014-15.
Massive cuts to the NHS, local government, and education budgets are not the inevitable solution to national debt. During the Second World War, the UK national debt reached much higher figures of up to 150 percent of the GDP. It is not uncommon for countries to borrow more during the time of serious national and international crises, like wars, or economic upheavals like the one currently affecting the world, and to pay back the debt over a period of time once the economy starts to grow again. In this sense, budget deficits can be an effective way to deal with shocks such as wars, financial crashes and deep recessions. If anything, the problem of low economic activity is the real, and more urgent, issue than the fiscal stability.
David Cameron’s ‘Big Society’ programme offers an ideological justification for the massive public spending cuts which are about much more than just deficit reduction. The pretence of ‘there is no alternative’ offers a means for the Conservative project to radically transform the state and to transfer more services and money from the public to the private sector. If the real intention was to take the British economy out of the crisis, then such massive cuts would not be the answer. There are alternatives: we need to find a fair and sustainable path out of crisis. Budget deficits will more or less automatically heal with the economic recovery. Trying to cut the deficit quickly, in the midst of a serious recession, will damage the economy and extend the crisis. The government instead should concentrate on growth and allow growth to reduce the deficit. Cuts will not reduce the deficit, investment will. Recently, the Confederation of British Industry (CBI) announced that it expects economic growth in 2011 to be much slower than previously predicted. A much weaker consumer spending, resulting from massive unemployment and lower wages in 2011, is described as the main reason for this. Cutting too far and too fast will mean more people out of work, fewer jobs in the economy, lower level of taxation from workers and businesses, and more people on unemployment benefit, which will cost the government more. The real challenge is to introduce constructive ways to restructure the national economy so that it can deliver strong and consistent growth.
The current crisis and the way some other parts of the world economy have been dealing with it successfully, and all social and cultural legacies of this turbulent process have highlighted, like never before, the crucial role of education. The financial and economic crisis has had a particularly strong impact on young people with low levels of education. Investments in education pay large and rising dividends for individuals, but also for economies. On average, a young person with a university degree will generate £77,000 more in income taxes and social contributions over his/her working life than someone with a high-school degree only. Even after taking the cost of university education into account, the net public return from an investment in tertiary education is £56 000 for a male, in generated income taxes and social contributions over his working life. Enhancing tertiary education attainment can therefore help governments increase their fiscal revenues, making it easier to boost their social spending, in areas like, for example education. As the global demand for jobs shifts up the skills ladder, it has become crucial for countries to develop policies that encourage the acquisition and efficient use of these skills to retain both high value jobs and highly skilled labour. Burchill is right to suggest that ‘clever working class youth of this country [have] been socially and spiritually ‘kettled’ – hemmed in, suffocated and stifled’ historically by ‘the privilege and entitlement’ of the likes of elite. But does the answer really lie in cutting away higher education for working class students altogether?
Britain’s total investment in higher education, even before the current cuts of the Coalition government, was 1.3 percent of the GDP which is behind the OECD average of 1.5 percent. Despite the student numbers rising by approximately 25 percent in the last 15 years, the UK has slipped from third to fifteenth position in numbers graduating among industrial countries because investment in higher education has risen much rapidly elsewhere. Within Europe, the UK is already falling behind France, Denmark, Finland, Sweden, Portugal and Netherlands, among others. Other Western governments, most notably the United States and Germany, have viewed the global financial and economic crisis as a sign not to retrench but to invest in their higher education systems as a necessary part of investing in the skills that will be needed for recovery in near future. In the UK, however, it was education that was first in line for cuts in spending: the cutting of the Future Jobs Fund, the cancellation of school building and refurbishment, the abolition of the Education Maintenance Allowance, and now funding cuts in university teaching budgets, fewer university places and a massive increase in university tuition fees. All these draconian measures will ensure that talented people from working class backgrounds will not achieve their full potential. The poorer you are the more scared you are by the prospect of tens of thousands of pounds of debt. It seems this is exactly what the Coalition government wants- to keep education for the rich and privileged. And this is what tens of thousands of students are protesting against. If we want British economy to recover and take its place in a much more competitive world, if we want Britain to be ‘open for business’, we should make higher education available for everyone, regardless of their social class. The more skilled people we have, the more likely companies will be willing to invest in the UK.
Bulent Gokay is a Professor of International Relations, Keele University and Farzana Shain is a Senior Lecturer, Keele University
Implicit almost all discussion of public expenditure and revenue, most virulently in the debate over deficit reduction, is the fallacy of public affordability. This fallacy is manifested, for example, in the argument in the United Kingdom that if university education is available to a large portion of the population, the public sector cannot afford to deliver it without substantial fees, even less to provide support grants to all students.
Because “the public sector cannot afford” to provide university education, it is necessary to ration the public contribution on the basis of need (income or means testing). The same argument is applied in very major area of social expenditure: with an ageing population, “the public sector cannot afford” to pay more than a safety net pension; cannot afford to provide all the drugs and care needed by that ageing population, and so on.
“Affordability” arguments are fallacious. The fallacy is obvious once one considers it from the level of society as a whole. Consider the example of funding of university education. Only a tiny minority of people would argue that primary education should be a matter for individual families to decide and wholly fund themselves. This near-consensus results from the conviction that children have a right to be educated, and that a democratic society requires an educated and informed public. These convictions, not finances, determine the provision of primary education by the public sector: for everyone, regardless of income or status, and if some wish to contract for private education, they may do so. The social consensus on public provision of secondary education is equally broad (for everyone), but number of years provided varies (lower in Britain than most developed countries). Only a few on the far right wing would argue that the pubic sector “cannot afford” to provide primary and secondary education for all, though in practice many right of centre attempt to minimize the expenditure and therefore the quality of provision.
The same principle applies to university education: what is the appropriate coverage and to what level? Here there is no consensus, and those who believe that people have no right to higher education avoid taking that potentially damning position by seeking cover under the affordability argument: “I wish we could provide everyone with a university education, but we cannot afford it. In any case, people gain personally from higher education, so they should pay for it themselves to the extent that they can. The public sector can only afford to help the poor, and if you are poor and clever you will find funding.”
This line of argument is the most superficial mendacity, and would apply equally to primary and secondary education (see my previous comment). The true essence of the affordability of higher education argument is, “People have no right to higher education. If they want it, let them pay for it. If you are poor and clever you might go to university. If you are dumb and rich you certainly will.”
When there is a social consensus that people have a right to a university education if they want one, then reducing public expenditure and raising fees does not save society money. There are two affects: 1) for those with high incomes it shifts expenditure from the public sector to households, and 2) for those on low incomes it reduces provision. It “saves public money” in the same sense that not filling potholes is a financial gain.
Most pernicious is the application of the affordability fallacy to pensions and health. Two core values of democratic societies are that children have a right to education and the old have a right to live their final years in decent conditions with dignity. Given this consensus on the elderly, discussing financial affordability is grotesque. The question is, in light of a country’s economic development and productive resources, what level of decency can and should society provide to everyone past a certain age? Once the level is decided, it merely remains to decide the institutional mechanism by which it will be funded. Considerable empirical evidence indicates that provision of pensions through the public sector has the lowest resource cost. This is primarily because unlike private insurers, the public sector need charge no risk premium. Its revenue is guaranteed, and the growth of that revenue is determined by the growth of the economy as a whole.
Even more obvious is the fallacy of the affordability argument for health care. It is an appalling manifestation of the power of capital in US society that there seems to be no consensus that everyone has a right to be healthy, a principle Franklin Roosevelt included in his “Economic Bill of Rights” speech in January 1944, that every American had “the right to adequate medical care and the opportunity to achieve and enjoy good health”. In almost every other developed country this principle is accepted. When it is accepted, as with education and pensions, the issue is not financial affordability, nor is it coverage (everyone qualifies). The only issue is the level of society’s obligation to itself on health care.
The affordability argument perpetuates a profoundly anti-social and anti-democratic fallacy. Whoever makes it asserts (as Margaret Thatcher did) that there is no society and no obligation to fellow human beings beyond an absolute minimum that the residual of social decency forces upon even the most reactionary Thatcherite or Reaganite. Reducing that residual of social decency is the project of the affordability fallacy. Existence is viewed as a collection of isolated individuals, for whom one has no concern, even if, or especially if, for those whose lives are rendered nasty, brutish and short.
An interview with Gerard Dumenil on his new book (coauthored with Dominique Levy) The Crisis of Neoliberalism (Harvard University Press, 2011). Courtesy: The Real News
The following text is devalued with increasing speed: the global crisis and subsequent struggles shake the global wage scale. In June 2010 the Indian government ‘free-floated’ the petrol and diesel prices, fueling the already double-digit inflation. In the UK the government increased the VAT by 20 per cent and cut wage-subsidising benefits. The collapsing Euro inflates the Rupee. The struggles in China and Bangladesh put pressure on wages in the global low-income zones. We will see whether class struggle and crisis will re-shape the global wage-division, old concepts like ‘workers’ aristocracy’ and most of the concepts of ‘integrated’ working-classes ‘in the imperialist nations’ will help little to understand. We need global proletarian debates.
The following ‘relative’ comparison of Delhi and London minimum wages and their respective purchasing power would be a rather tedious endeavor if seen as a purely statistical enterprise or poverty competition. It would result in the usual ‘statistical findings’, e.g. that if you are inclined to become a well-groomed truck-driver with a passion for cheap daily newspapers and road-side cups of tea you should move to Delhi; whereas for any other reasons you should make it to or stay in London – if you can – because you will earn roughly four and a half times as much in terms of purchasing power. If you were a textile company manager looking for low wage zones your perspective might be a little more blunt. You would compare the absolute wage difference between a potential minimum wage worker in London’s East End (around 1,200 GBP per month) and those of a worker in Delhi’s Okhla industrial zone (around 76 GBP per month). The fact that in absolute terms the London wages are about sixteen times higher will make investment decisions a fair bit easier.
We compare the workers’ wages to consumer goods and services. This in itself will tell us little about the actual social position we find ourselves in once we depend on this wage and have to sell our labour power for it. How does our wage compare to the income of people in the city around us? Will we feel ‘excluded’ from wider social life and life-styles? How does the wage compare to the general ‘productive social wealth’, the material power to set in motion bodies and minds for profitable purposes or mass destruction? We compare wages which are set by two different states, wages which are defined as ‘minimum’ in terms of the local, moral, historic minimum level of reproduction for a worker. One local context is the capital of an ‘ex-colony’, the capital of a developing country, the regional centre of an emerging global industrial cluster. The other local context is the capital of an ‘ex-empire’, the centre of historical Industrial Revolution, with 250 years of industrial working class history. The centre of world finance, real estate bubbles and a declining manufacturing base. This also means that Delhi area is dominated by a work-force which – in general sense – knows how many acres of wheat you can reap in a certain amount of time or how many shirts or metal parts a worker can produce per day. Productive workers from mainly rural backgrounds have a rough notion how their productivity relates to wages they receive and prices they have to pay. London is characterised by mainly ‘unproductive labour’: a cleaner might know how much money their company charge the client, they know about exploitation on an immediate level, but less on a social scale.
Workers’ wages and their consumption level tell us something about the ‘stage of capitalist development’, if we agree that one of the characteristic outcomes of industrial working class struggle is that after the class wars of mining, railway building and machine and weapon manufacturing workers a following generation of workers is able to buy ‘industrial goods’ in form of long-lived consumption goods like radios, fridges or washing machines. We also have to mention the ‘sources’ of our consumer products. In Delhi we refer to the most common trade-form for basic food items, vegetables or durable consumer goods: small traders. The prices in London are based on prices of large super-market chains for daily goods and internet price comparisons for durables – because this is how proletarians shop in general. We leave it to a different research to find out whether the demise of small traders and the consequent drop of general wage level due to increased competition will be compensated by ‘cheaper’ large-scale and ‘more direct’ trading.
When we compare London-Delhi wages relative to food items, the London wages are about five to six times higher, if we compare them in relation to the mentioned ‘durable consumer articles’, London wages are fifteen times higher. The astonishing fact is the relative ‘expensiveness’ of agricultural goods’ in India, compared to ‘basic manufactured items’: While I can buy five times as much rice of my London minimum wage, I can ‘only’ buy three times as many shirts or shoes. This is only partly due to higher relative petrol prices in India, which form a decent chunk of food prices. Apart from room rents – which are a peculiar issue – it is personal services such as cooked food or hair cuts where a minimum wage in Delhi can command as much personal service labour as the wage in London. This tells something about the low levels of service proletarian wages in the Indian metropolis! Out of good attitude we put ‘global goods’ into the equation, e.g. Nescafe, Mc Chicken, Nokia mobile phones or IPods. We can see that the ‘wage division’ widens when it comes to these ‘global goods’ – which doesn’t mean that the Delhi young proletarian would not have access to the ‘use value’ of these goods. Let’s not argue about the use value of a McChicken, but of Chinese Fake-Brand MP3-Players or Handy-Cams. Apart from the ‘old school’ consumer durables like fans, gas-cookers and bicycles, the modern proletarian in Delhi owns a mobile phone with gadgets. We suggest the thorough article on Sanhati: “Do 600 Million Cellphones Make India a Rich Country”
But let’s stick to the basics: the level of minimum wage as means of reproduction for a worker. Behind this phrase a political field of question opens up. In London the nominal/direct wage does not cover reproduction, in the sense that in case of illness, unemployment, old age the state has to guarantee an additional part of income. The London minimum wage is hardly a ‘family wage’: the state has to top up in terms of child benefits etc. In Delhi these ‘welfare provisions’ only exist on paper, in 90 per cent of cases workers won’t get unemployment or pension money, neither health care. For most workers in Delhi the minimum wage has to cover parts of these future or ‘accidental’ costs. In a purely economical sense we would have to add these monetary benefits or service costs to the London minimum wage. On the other hand a London worker is very likely to be ‘fully proletarianised’ in the sense that s/he hasn’t got a ‘second home’ in a village and no access to – however small – a piece of land and wider family network which could act as a basic security net. We can argue whether it is not the other way around – that the urban wage has to finance the maintenance of the small piece of land and the rural family members. Fact is that many workers in Delhi industrial areas try to save money – first of all on rent – in order to be able to ‘save money for the home’. Ideally a ‘single worker’ – who is either unmarried or whose family lives in the vilage’ will try to save half of his or her monthly wage. The most common life perspective – or illusion – is that the urban industrial wage work is a temporary stage and that there is a future as semi-peasant / shop-keeper etc. in the village.
When it comes to rent and living arrangements the ‘village’ plays a role. In London only ‘migrants’ would stay five people to a room, no separate kitchen – which is the norm in Delhi, not only for families, but also for unrelated young workers. In this way they can drop the rent share of their total wage to under 10 per cent. In London you might rent a room in a shared flat, giving you access to a kitchen and a toilet, which will cost you around 50 per cent of your wage. In the relative wage comparison we took all three different scenarios into account: comparing the most common set-up; comparing ‘a single worker’ to ‘a single room’ according to the respective local ‘workers’ housing standards’; comparing ‘a single worker’ to ‘a single room’ according to London housing standards. The main obvious result is that compared to other ‘goods’ rent in London is relatively high and the main reason for why the relative wage levels are ‘only’ four to five times higher. Who would have thought?! At this point the quantitative state of mind leaves us clueless: Is it expression of a higher living standard to live in a London Stratford bed-sit, while your two-weeks dead neighbour starts to send his whiffs through the mortar?
What about the ability of workers in Delhi and London not only to be a categorial part of global working class formation, but to take part in it in a physical and communicative way. We can compare costs for flights Delhi-London and costs for an hour spent on the internet and we can see that a flight belongs to the ‘fridge/washing machine’-category out of reach for most Delhi workers, while the internet is closer to home. Here again, we reach other forms of exclusion. Even if a worker in Delhi would be able to save money for the flight, that does not mean that s/he will get a visa. Even if a worker in Delhi can surf on the net, the fact that the Hindi sites are still rather insular compared to the ‘global electronic village’ of the the English speaking Indian upper-class is not an ‘economical’ problem. Which does not mean that the worker in Delhi would not have the means for ‘political mass-expressions’, see prices for printing a small newspaper or for sending it by post. On a similar relative price level range the products of ‘knowledge circulation cum mental domestication’ such as daily newspapers or cinema. In terms of access to career paths to leave the minimum wage misery it looks rather bleak for proletarians on both sides of the globe. A truck driving license might be within reach, but won’t solve the initial problem. The worker in Delhi would have to save around 833 years in order to afford the two years fees for a MBA (management degree), while the worker in London might make it in 20 years. Great.
How do these wages relate to themselves in the historical dimension, does the gap close or widen over time? Difficult question. We can assume that since it’s introduction in 1997 the relative minimum wage in the UK fell – which was 3.60 GBP at the time. But did it increase in Delhi? Minimum wage in Delhi 1990 was around 900 Rs. The early 1990s were turbulent times in terms of inflation, up to 18 per cent annual consumer price increase in 1994 to 1996. If we assume an average annual inflation of around 8 per cent for 1990 to 2010 period, the wage of 900 Rs would have had to increase to 4,177 Rs by 2010 to compensate. Here the fundaments of statistics become drift-sand. Since 1990 the share of temporary and casual jobs, the amount of jobs through contractors increased rapidly, while more and more permanent workers lost their jobs. May be the minimum wage has increased in real terms, the general conditions of industrial workers in Delhi have hardly improved. In what kind of ‘working class position’ would a London minimum wage be situated in Delhi? If we take a common commodity basket (rent, food, clothes, transport, consumer goods – according to average share of total wage), we come to a medium wage ratio of 4.5 times higher wages in London. This would mean that the ‘equivalent’ to the London wage in terms of purchasing power would be around 23,400 Rs per month in Delhi. What kind of wage workers in Delhi would earn this kind of wage – which would place them into widely hailed ‘emerging Indian middle-class’? Some call centre workers earn that kind of money. Permanent workers in the automobile industry earn this much, partly more. We can see that major wage differences run within the industrial areas of Delhi as much as within the global working class. We can also see that the ‘wage question’ is everything but an ‘economical question’, but – in the end – a question of social-historical power, of class power. Let’s stop calculating!
But whoever wants to know how we calculated things: We could see a rather shaky exchange rate between Rupee and British Pound during 2009 – 2010. At the end of November 2009 the rate was 1 GBP / 78 Rs. Since then the British Pound steadily declined in value – or rather, the Rupee got appreciated. On 3rd of May 2010 the rate was 1 GBP / 68 Rs. For the total wage calculation we take the minimum wage for industrial helpers in Delhi May 2010 of 5,200 Rs per month based on an 8-hours day and a 6-days working week. We have to emphasise that only a fraction of workers actually get this wage, most workers earn less or have to work considerably longer hours for it. We base the London hourly minimum wage of 5,80 Pounds on the same monthly working times.
Item [Kilo Rice]: Price Rs in Delhi [22 Rs] / Price GBP in London [1.10] – Amount of Items I can buy with monthly wage in Delhi [236] / London [1091] (London Wage this times higher/lower than Delhi Wage [4.6])
Based on the recommendations of the Kirit Parikh Committee, the Government of India (GOI) on 25 June, 2010 announced the full deregulation of the prices of two crucial petroleum products: petrol and diesel.[1] Henceforth, prices of these two products will be determined by the unfettered play of market forces and government “subsidies” on these products, which worsen the fiscal situation, will be completely removed.[2] In one deft move, therefore, government control over the determination of the prices of these key commodities was willingly ceded to the magic of the market, presumably to “rationalize” prices and to wipe away losses of state-run Oil Market Companies (OMCs) to the tune of Rs. 22,000 crore.
There were generally three types of reactions to this announcement in the mainstream English news media. Firstly, the markets were ecstatic about the full liberalization of petrol and diesel prices and these sentiments were almost immediately reflected in rising oil stock prices.[3] Secondly, there were strident complaints that this policy change was not enough: prices of kerosene and liquefied petroleum gas (LPG) were still minimally under government control and therefore even after the deregulation move, the losses of the OMCs on account of these two petroleum products would stand at Rs. 53,000 crore for fiscal 2011.[4] Thirdly, various opposition parties have pursued their ‘Bharat Bandh’ without much vigor.
Before getting into a detailed analysis of the political economy of oil prices in India, let us quickly address three questions. Why are the financial markets and the mainstream media pleased with the liberalization of petrol and diesel prices? An important reason is that this policy shift is a victory for capitalist interests of a long drawn struggle against the regulation of oil prices in India. Using the myth of subsidization and fiscal burden, capitalist interests have long been pushing for the liberalization of oil prices. The first crucial victory of this struggle came in 2002 when the government dismantled the administrative pricing mechanism (APM). This move reduced the “subsidies” on petrol and diesel but the government decided to continue to “subsidize” kerosene and LPG. In 2005, the GOI constituted the Rangarajan Committee to study pricing and taxation of petroleum products.[5] This committee recommended a half-way house: a ceiling on the refinery gate price (computed according to the so-called trade parity formula) along with the freedom for OMCs to set retail prices. Of course, this was not enough. Accordingly, in 2009 the next committee was constituted to examine the same set of issues, i.e., the Kirit Parikh Committee.[6] In its report submitted in February 2010, the Kirit Parikh Committee finally recommended what the capitalist sector had been telling GOI all these years. It recommended full liberalization of petrol and diesel prices.[7] Although it was famously opined that the “executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie” we wonder whether it might be more reasonable to believe instead that “the committees of the Indian state are but committees for managing the affairs of the big bourgeoisie under neoliberalism.”
In any case, this immediately bring us to the second question: what will the next committee recommend? The Kirit Parikh Committee has allowed some minimal control over the prices of kerosene and LPG. Recall that the private sector is livid with the residual losses of the OMCs (often misleadingly equated to the “under recoveries”) to the tune of Rs. 53,000 crore resulting from the marginal control that had been retained in the pricing of kerosene and LPG. Thus, even if one does not know the exact date when the next committee on petroleum prices will be set up, one presumes that this yet-not-constituted committee will strongly recommend liberalization of kerosene and LPG prices. Otherwise, it would be either censored or ignored under the current arrangements.
The third question is related to the carefully constructed mythology of oil prices in India. One of the crucial components of the carefully nurtured mythology about oil (i.e., petrol, diesel, kerosene and LPG) prices in India is the idea that the government offers a huge subsidy to consumers. This subsidy, it is claimed routinely in government pronouncements, policy analyses and media reports, shows up as the “under recovery” of state-owned OMCs and pushes up the budget deficit of the government. The subsidization of oil products, follows the next step in the argument, is wasteful of scarce resources. It is ultimately unsustainable from a public finance perspective and should therefore be curtailed. How should this huge subsidy burden be curtailed? By withdrawing government control over petroleum product prices and letting market forces a free rein, or so runs the argument.
The wide currency of this argument would be obvious from even a cursory glance at mainstream media reports related to oil prices in India. A Business Standard report last year highlighted the close to Rs. 25,000 crore of “under recoveries” of the OMCs, dramatizing this “finding” by suggesting a revenue loss of Rs. 75 crore a day.[8] Similar reports find their way to the international media too. Earlier this year, Reuters highlighted the need for deregulation of oil prices because of the increasing burden of “under recoveries.”[9] A special 2008 report on BBC made the same point and speculated that Indian oil companies might be losing about 100 million US Dollars (USD) a day.[10] The Financial Times, in an editorial of July 6, 2010, argued for the need to phase out “subsidies” and end state control over petroleum prices.[11] Such pronouncements are not confined to media reports. It is also propagated by policy analysts in various research institutes. In a series of studies starting at least as early as 2006,[12] the International Energy Association (IEA) of the Organization for Economic Cooperation and Development (OECD) has highlighted the so-called fiscal burden of “under recoveries” of the OMC and has argued for the deregulation of oil prices.[13]
To sort through the complex of issues surrounding oil prices in India we need to address, at least, the following questions. Is the government really subsidizing petroleum products? Can “under recoveries” of the OMCs be understood as a measure of such subsidies? What, after all, are these “under recoveries”? Why is the private sector ecstatic with the deregulation of petrol and diesel prices? To answer these questions we will adopt a political economy perspective, i.e., we will try to see the class interests lurking behind the analysis of “experts”, changes in government policy and news coverage in the mainstream media. Once we carefully sort through the issues we will see that there is a simple motive force behind the whole complex of policy changes and committee recommendations: private sector PROFIT and more PROFIT.[14]
OIL INDUSTRY: STRUCTURE AND PRICES
To understand the much talked about “under recoveries” of the OMCs, it would help to familiarize oneself with the structure of the oil industry in India. The industry starts at what analysts call the “upstream” end, the site of exploration and production of the primary component that gives all varieties of petroleum products: crude oil. The major state-owned players in the upstream sector are Oil and Natural Gas Corporation Ltd. (ONGC), and Oil India Ltd. (OIL); the major private sector players are Reliance, Cairn Energy, Hindustan Oil Exploration Company Ltd. (HOEC), and Premier Oil.
The output of the upstream sector is crude oil, which feeds into the “downstream” sector: the sector responsible for refining the crude oil to get petroleum products (like petrol, diesel, kerosene and LPG), marketing the final products, and development and maintenance of pipelines. The major state-owned entities in the downstream sector are Indian Oil Corporation Ltd. (IOCL), Hindustan Petroleum Corporation Ltd. (HPCL), Bharat Petroleum Corporation Ltd. (BPCL), and Mangalore Refinery and Petroleum Ltd. (MRPL); the major private sector players are Reliance, Essar and Shell.
The distinction between the upstream and downstream sectors give us several important prices. There are the price of crude oil, and the refinery gate price of petroleum products. The first is the price that refiners pay to purchase the crude oil (either from domestic or foreign producers), and the second is the price at which the refiners “sell” the petroleum products to the next stage of the industry. Note in passing that about 80 per cent of India’s crude requirement in 2008-09 was met with imports. Hence, this is the primary channel through which international prices of crude oil affects the Indian economy.
The final sector of the industry is that which maintains an interface with the consumers, the sector which takes care of transportation and distribution of the petroleum products to the retail outlets. The major state-owned players in this sector are GAIL (India) Ltd., and IOCL; the main private sector players is Petronet India Ltd., though Reliance, Essar and Shell have also entered into the fray. This brings us to the third important price in oil industry analysis, the pre-tax price: this price can be arrived at by adding marketing, storage and transportation costs to the refinery gate price of the relevant petroleum product. Adding excise duty (a form of tax levied by the Central Government) and sales tax (levied by State Governments) to the pre-tax price gives the final retail price of petroleum products, the price, for instance, that you or any of us pay at the petrol pump.
Let us summarize: the retail price of petroleum products (like petrol, diesel, kerosene and LPG) equals the sum of the price of crude oil, refining cost plus profit, marketing & storage cost plus profit, distribution cost plus dealer profit, and taxes & duties.
PETROL: COMPONENTS OF PRICE
To clarify matters further and to get a firm grasp on the various prices that we have introduced, let us work through a concrete example. In July 2009, the average international price (FOB) of crude oil was 64.618 USD per barrel, which translates into 1.538 USD per gallon and hence 19.87 rupees per liter. Note that in converting from USD to rupees we are using the average exchange rate between the USD and rupees that prevailed in July 2009: 48.83 rupees per USD.[15] Two things should be kept in mind. First, in 2008-09, India imported about 80 percent of its crude oil consumption; second, in the current dispensation there is zero customs duty on crude oil.[16] Hence, for the oil industry in India, the price of crude oil was 19.87 rupees per liter.[17]
Figure 1: Price Build-Up for Petrol
In a written reply to a question in the Lok Sabha in August 2009, Petroleum Minister Murli Deora informed that “of the Rs 44.63 a litre retail selling price of petrol in Delhi, Rs 13.75 is because of the incidence of excise duty and Rs 7.44 a litre due to sales tax.”[18] Here we have two more prices: the retail price of petrol in Delhi(44.63 rupees per liter) and the pre-tax price of petrol (23.44 rupees per liter).
As far as we know refinery gate prices of petroleum products are not publicly available; hence we cannot give exact figures for these prices. But we do have publicly available information which allows us to provide rough estimates of refinery gate prices. In a November 2006 report on the cost structure of OMCs, we learn that the average operational and function costs (excluding labour cost) of the OMCs come to about 1.9 rupees per liter. Thus, if we deduct this amount from the pre-tax price of peterol (23.44 rupees per liter), we arrive at the following rough estimate of the refinery gate price of petrol in India in July 2009: 21.54 rupees per liter. This information is summarized in Figure 1 and 2.
Figure 2: Components of Retail Price of Petrol
UNDER RECOVERIES?
With this background in place, we can now address the issue of “under recoveries”, which is misleadingly referred to either as “losses” or as “subsidy”. The OMCs “are currently sourcing their products from the refineries on import parity basis which then becomes their cost price. The difference between the cost price and the realized price represents the under-recoveries of the OMCs.” (Rangarajan Report, 2006, v). In other words, under recovery = import parity price – realized price. Realized price is something on which the government exercised some control. If this is fixed at a lower rate than the import parity price then under recovery shows up. But under recoveries are different from losses. To understand this we need to focus on the definition of import parity price. The Rangarajan Report informs us,
[i]mport parity pricing has been a commonly used approach in a regulatory context or in making a case for tariff protection. The argument in support of this approach is that in a situation where there is no domestic manufacture of a product, the cost of supplying it in the domestic market will be the landed cost which is the import parity price. However, even in a situation where there is domestic manufacture, import parity price can be taken as the international competitive price that sets the ceiling for the domestic price. When domestic refiners are given the import parity price, they enjoy a rent which is equivalent to the differential in ocean freight and associated costs as between crude and products. In such a situation, there is case for mandating the refiners to share the rent with public interest. (Rangarajan Committee Report, 2006, pp. 5)
In other words, import parity price is the price which one would pay if the good is imported. In India this is clearly not the case as demand for petroleum products (like petrol, diesel, kerosene and LPG) can be met by domestic refineries. Indeed, there is a 35% surplus refining capacity over the domestic demand (Sethi, 2010). The price at which domestic refineries can supply petroleum products (export parity price) is less than the import parity price. The difference was about 1.71 rupees per litre of diesel in April-Spetember 2005 (Rangarajan Committee Report, 2006, pp. 4). To correctly measure the under recoveries, therefore, a better formula would be to use export parity price as the benchmark. Using import parity price inflates the notional concept of under recovery, which is then trumpeted by the mainstream media as state-owned OMC losses. Secondly, it is also to be noted that the government had provided sumptuous subsidies towards building the refineries. It is but natural that the refineries share some burden by quoting a lower benchmark price. Instead, the private refineries are being allowed to sell products at import parity price to the state OMCs (Rangarajan Committee Report, 2006, pp. 30). The third reason why under recoveries are only notional and “are different from the actual profits and losses of the oil companies as per their published results” is that “[t]he latter take into account other income streams like dividend income, pipeline income, inventory changes, profits from freely priced products and refining margins in the case of integrated companies.” (Rangarajan Committee Report, 2006, v). Public Sector oil companies do constitute an integrated structure – the notional losses of the OMCs are therefore shouldered by the upstream firms such as the ONGC, and GAIL (Rangarajan Committee Report, 2006, 30). They also are some of the biggest profit earners of the country[19]. Hence to talk about unsustainable susbsidies is a white lie.
To sum up: first, under recoveries can only occur when there is some control over the prices that OMCs can charge the consumers; if OMC were given full flexibility in terms of setting prices, they would probably always charge a price so as to keep the under recoveries to nil. Second, most of the OMCs don’t import petroleum products (like petrol, diesel, kerosene and LPG). They buy these products from refineries which, in turn, import crude oil. Thus, import parity price – which uses the import price of petroleum products instead of crude oil – is only a notional cost that they pay for the products they sell to the consumers. Hence, “under recoveries” of the OMCs refer only to a notional value of the losses of the OMCs; it is not a real quantity which figures on their balance sheets. Thus, it is a mistake to equate “under recoveries” with state-owned OMC losses, as the mainstream media constantly does. Of course, the meaning of under recoveries will change drastically if we allow private sector players into the scenario, as we will see later.
While the mainstream media commits the mistake of portraying the under recoveries of the OMCs as “losses”, government officials and policy analysts err by depicting the under recoveries as “subsidies” or “effective subsidies” (the 2009 IEA report and the Kirit Parikh Committee are notable recent examples). Let us see why.
GOVERNMENT SUBSIDY?
It is meaningful to talk about government subsidies in relation to a commodity only when the tax revenue generated by the commodity (for the government) is lower than the subsidy that the government offers to producers/sellers of that commodity. Another way of saying the same thing is to insist on the usage of net subsidies: if the government tax revenue on a commodity is higher than the subsidy that it offers on that commodity, then on a net basis the subsidy is a negative quantity. In such a situation it is meaningless to say that the government subsidizes the commodity.
Figure 3: Financial Balances of the Oil Sector in India
Is the GOI subsidizing petroleum products in any meaningful sense, i.e., on a net basis? There is a simple way to answer this question: compare the total tax revenue coming from petroleum products to the exchequer with the sum of under recoveries and direct subsidies. Figure 3 plots precisely these quantities for the past few years. Note that the sources of the data in Figure 3 are as follows: (a) the data for under recovery, taxes (sales tax) and duties (excise and customs duties), and total revenue has been taken from the website of the Petroleum Planning and Analysis Cell (PPAC) of the Ministry of Petroleum and Natural Gas, GOI, and the Kirit Parikh Committee Report; (b) the data for direct subsidy has been taken from Table 26, Basic Statistics on Indian Petrol and Natural Gas. [20]
Several interesting facts emerge from Figure 3. First, the direct subsidy of the GOI for petroleum products is extremely small. In fact, direct subsidy is a tiny fraction (less than 1 percent) of the total tax revenues from the oil sector. Second, the total contribution of the oil sector to the exchequer has been higher than the sum of under recoveries of the OMCs and direct subsidies on petroleum products for all the years since fiscal 2004. Third, even the sum of duties (customs and excise) and (sales) taxes on petroleum products, which is only a fraction of the total contribution of the oil sector to the exchequer, has exceeded the sum of under recoveries of the OMCs and direct subsidies in all the years since 2004-05. The inescapable conclusion from Figure 3 is that there is a negative net subsidy on petroleum products in India. Another way of saying the same thing is that the government extracts a net positive tax revenue from petroleum products in India. The oft-repeated assertion that petroleum products are subsidized in India is simply not true.
WHAT ARE UNDER RECOVERIES, TRULY?
We have suggested, so far in our analysis, that under recoveries of the state-owned OMC are neither financial losses (because notional prices are used) nor can they be used as measures of subsidization (because there is negative net subsidy on the oil sector).
What are they? Why is the private sector and the mainstream media so concerned about under recoveries?
To get a handle on this important issue, let us imagine a vertically integrated, state-run corporation that sells petroleum products. This corporation imports crude oil, much like India does today, refines it to produce petroleum products and sells it to consumers. Thus, this corporation contains within itself both the upstream and the downstream sectors of the industry, as well as the retailers/dealers. If the final price at which this hypothetical corporation sells petroleum products to the consumer is higher than the sum of the price of crude oil, the cost of refining & distribution (with some rate of return included) and taxes/duties, then this corporation would be said to be making a profit (from the perspective of the people of the country).
Now, let us break up this hypothetical state-owned corporation into two parts, one of which is involved only in refining and the other only in distribution, both still being state-owned. In this case, there will be two balance sheets and the transaction that was earlier internal to the big corporation would now show up as sale/purchase between the two smaller corporations. Even in this case, we would adopt the same procedure as above to see whether the two firms taken together are making a profit: if the final retail price is higher than the sum of the price of crude oil, the cost of refining & distribution (with the same rate of return as before included for both corporations now) and taxes/duties, then the arrangement is profitable. In other words, it does not matter if “losses” show up in the balance sheet of one of the corporations as long as the government’s tax revenue is adequate to cover that “loss”.
Thus, if the government administratively fixes the price of petroleum products such that the distribution corporation suffers under recoveries, it is hardly a matter for concern because (a) the government’s tax revenues are far above the under recovery of the state distribution corporation (in our example), (b) upstream firms make enough profits to bear the burden. This is more or less the situation of the oil sector in India if we consider the state-owned upstream and downstream corporations taken together. Since the total revenue from the sector, and government taxes, are higher than the “losses” showing up on the balance sheets of some of the corporations, Indian society is not making a net loss.
The last and crucial step of the argument is to allow private sector players into the scenario and see how everything changes drastically. Continuing with the example, suppose now, we have, in addition to the two state-owned corporations, a private corporation. This hypothetical capitalist firm is involved in refining and distribution. Now, it is obvious that government control over prices that lead to “under recoveries” would translate into true losses or lower rates of profit for the private corporation. If the realized price is lower than the import parity price, in the balance sheet of the private OMC it would show up as loss – provided the OMC adopts the import parity price as the benchmark. But since the private firm has the refining facilities arm, like Reliance for instance, overall the firm might still make a profit because (a) taking import parity price as the benchmark means high profit margin for the refinery, (b) even without this high margin the refinery may itself be profitable enough to make up for the loss of the private OMC. Nevertheless, let us note that decontrolling the “realized price” promises even higher opportunities to earn profits for the private sector firm, as no under recovery now shows up.
That really brings us to the crux of the matter as regards under recoveries. The under recoveries of the OMCs do not mean much as long as they are covered by the tax revenue of the oil sector only when private sector players are absent from the scenario. As soon as private sector players enter the picture, the under recoveries of OMCs become a proxy for the losses of private sector players. Since the private sector wants to enter the oil sector and earn windfalls, it highlights the under recoveries and policy analysts endeavor to show it as a burden and the mainstream media faithfully relays that concern. The way to remove the under recoveries, i.e., the way to ensure a positive and high rate of profit for private capital in the oil sector is to do away with cause of under recoveries: government control over petroleum product prices. Hence, the recommendations of various “experts” is to liberalize oil prices, and the GOI, by accepting and implementing that recommendation is working to ensure high and positive rates of profit for private capital in the oil sector.
Let us end with an example that you can chew. From Petroleum Minister Murli Deora’s answer to the Lok Sabha we know that the pre-tax price of petrol was about 23.44 rupees per liter in July 2009; if Reliance or Essar sold petrol in Delhi in July 2009, this is roughly the after-tax revenue it would make on each liter of petrol. What would be an estimate of the cost that Reliance or Essar would bear for a liter of petrol? In July 2009, the average international (FOB) price of crude oil was, as we have already noted, 64.618 USD per barrel, which translates into 19.87 rupees per liter.. Thus, if Reliance or Essar imported crude for their refineries, they would pay about 19.87 rupees for each liter.
What mark-up over processing and marketing cost would they want? The average international pre-tax price of gasoline in July 2009 was about 2.33 USD per gallon; since the international price of crude oil was 1.538 USD per gallon, this implies a mark-up over processing and marketing cost of 1.515 (= 2.33/1.538). Thus, for an international oil company, the price of petrol (gasoline) was set at about 152 per cent of the cost (of crude oil). It seems reasonable to assume that Indian capital would also like a similar, if not higher, mark-up over cost. Thus, in July 2009 Reliance or Essar or Shell would have liked to be able to set a pre-tax retail price that was 152 percent of the cost of crude oil. So, what pre-tax price of petrol in India would have been required to ensure an internationally competitive mark-up over processing and marketing cost? The answer is 30.20 rupees per liter (= 19.87 * 1.52).
Now things are clear. According to the Petroleum Minister, the pre-tax price of petrol in Delhi was only 23.44 rupees per liter in July 2009; that meant, using an international rate of return benchmark, a 6.75 rupees per liter less profit for a private sector player like Reliance. That, it is clear, was enough to create a hullabaloo about under recoveries and fiscal burden and the efficiency of the market and push the government to set up the Kirit Parikh Committee and decontrol petrol and diesel prices. Profit, you see, is what this whole fuss is about.
[2] The Times of India has reported that diesel prices have not yet been fully deregulated. This is misleading. The very first paragraph of the press release of the government (http://www.pib.nic.in/release/release.asp?relid=62834) says: “In the light of Government’s budgetary constraints and the growing imperative for fiscal consolidation, and the need for allocating more funds to social sector schemes for the common man, the Government has decided that the pricing of Petrol and Diesel both at the refinery gate and the retail level will be market-determined.” (emphasis added) The next sentence of the press release has the caveat that the TOI report picks on: “However, in respect of Diesel, the initial increase in retail selling price of Diesel will be Rs. 2 per litre at Delhi, with corresponding increases in other parts of the country. Further increases will be made by the Public Sector Oil Marketing Companies (OMCs) in consultation with the Ministry of Petroleum & Natural Gas.” So, it is true that any price increase of diesel which is over Rs. 2 will require government consent at the moment, but this seems mere window dressing given that the principle of market-determined retail prices has been accepted and loudly affirmed.
[7] Writing on the budget earlier in the year, Debarshi Das had already noted the government’s move towards decontrolling prices of petroleum products to facilitate the growth of private profit: http://sanhati.com/excerpted/2205/
[14] Some of the points raised in this article were also made by Surya Sethi in a post-budget analysis in the EPW (“Analysing the Parikh Committee Report on Pricing of Petroleum Products,” Economic and Political Weekly, March 27, 2010)
[17] To be more precise, we will need to add the the cost of insurance, ocean freight, ocean loss; this quantity is typically assumed to be about Rs 50 per tonne (http://www.projectsmonitor.com/detailnews.asp?newsid=9540). Since it is not very large, for our current computation, we will ignore it.
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.)
[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.
The following article on the present rise in prices of sugar has been written by Kobad Ghandy, the CPI (Maoist) leader now lodged in Ward No. 8 of Tihar Jail No. 3. Though suffering from prostrate cancer and incarcerated in prison he retains an alert mind as is reflected in the following article sent specially for publication in this journal (Mainstream).
At Rs 50 per kg sugar prices have never been so high. With sugar prices soaring, prices of all sugar linked products—sweets, mithais, tea etc.—have also sky-rocketed. Not only will festivals for most become a drab affair, children’s wailing for the little sweet or toffee will get louder. At the rate at which sugar prices have been rising it will be out of reach of many a poor and middle-class life.
One would have thought, given the free-market mantra of the rulers, that high sugar prices would at least convert into higher prices for the producers—the fifty million sugarcane farmers. But that was not to be; the so-called free market functions only to benefit big business, traders and politicians. In this case both the producers and consumers are being crushed by the cane and sugar pricing policies of the government dictated by the millers and international sugar cartels.
It is indeed a policy that has resulted in windfall profits for a few at the cost of millions of farmers and crores of consumers. And the solution being suggested—huge duty free imports—will help no one except the importers, the foreign traders and the bureaucrats/politicians who will get their commissions on each order. The entire people of our country are made to suffer so that a few may make fortunes. This is indeed tragic.
And while the entire people suffer the politics of sugar is diverting the entire issue with the Central and UP governments throwing the blame on each other.
Farmers being Crushed
In October last year the Ministry of Consumer Affairs (Food and Public Distribution) changed the pricing regime for sugarcane and introduced a Fair and Remunerative Price (FRP) mechanism, replacing the Statutory Minimum Price (SMP) system that was prevailing till then. Soon after passing the ordinance the Central Government declared an FRP to the millers to purchase sugarcane at Rs 130 per quintal, when, according to the NAFA (National Alliance of Farmers’ Association), the input cost of one quintal of sugarcane is roughly Rs 233.5 per quintal. This FRP therefore amounts to a massive loss to the farmer.
Immediately after the announcement, farmers (from UP) took to the streets stopping rail and road traffic. They marched to Parliament. They seized trains that sought to bring imported raw sugar and prevented them from reaching the mills. Some took the extreme step of self-immolation. Others burnt their crop. With the rabi season approaching many resorted to distress sales, selling their crop to local gur manufacturers at Rs 155 per quintal. Under pressure from the farmers the UP Government banned the import of raw sugar.
According to the new order, the FRP shall be fixed by the Central Government from time to time. It also specified that any other authority fixing a price for the crop above the FRP would have to bear the difference. (The latter point was retracted after the farmers’ march to Parliament.) The practice so far was for States such as UP, Tamil Nadu, Punjab and Haryana to declare the State Advised Price (SAP) that mills are required to pay farmers. This was usually higher than the SMP which was announced by the Central Government on the basis of the cost of cultivation estimated by the Commission for Agricultural Costs and Prices (CACP).
As it is, for a number of years, sugarcane growers have been squeezed by the low prices paid by the millers and the spiralling input costs. This has led even to many suicides of sugarcane farmers who had at one time earned a good amount for the crop. In fact in the four years from 2004-05 to 2008-09 the SMP for sugarcane barely rose from Rs 79 per quintal to Rs 81 per quintal while input costs increased phenomenally. In addition, the millers cheat the farmers in varied ways—weighing, recovery rate etc. So it is not surprising that sugar production dropped drastically from 27.8 million tonnes in 2007-08 to 16 million tonnes last year. In the coming year production is not likely to be more than 15 million tonnes.
The government did not create a buffer stock in 2006-07 and 2007-08 when production was at its peak. In 2006 when international prices were high (Rs 20,680 per tonne) and local prices were low (Rs 13,000 per tonne) the government banned exports. At that time due to large stocks and ban of exports the millers harassed the farmers paying them late. In 2007-08 when international prices crashed to Rs 13,000 per tonne the government exported 68 lakh tonnes of sugar even though sugar production was dropping. Later when there was shortage the government imported sugar at Rs 10-35 per kg.
It is these shortsighted policies of the government which have played havoc with the lives of the sugarcane farmers. In its report for 2008-09 the CACP warned the government that unless it raised the SMP for sugarcane the net area under the crop would continue to fall. But the government could not be bothered. They expect the millers will import raw sugar and continue to make money. The area under sugarcane cultivation dropped from 4.38 million hectares last year to 4.21 million hectares—that is, a drop of about 1.5 lakh hectares in just one year. Farmers are shifting away from sugarcane cultivation.
Consumers Robbed
Sugar prices have tripled in the last one year from Rs 17 per kg a year back to Rs 50 today. In just the last four months it has risen by over 40 per cent from Rs 32 per kg. Notwithstanding the claims of the Agriculture Minister, sugar prices are unlikely to drop. When production is estimated at a mere 15 million tonnes and consumption at 23 million tonnes without a single kg of buffer stock (compared to 10 MT at the beginning of last year), the price will be determined by the cost of imports. Given the shortfall, a minimum of eight million tonnes will have to be imported.
The raw sugar import cost to the miller will not be less than Rs 38 per kg. With such high costs, what the consumer has to pay is not likely to be below Rs 50 per kg. And with India entering the international market with huge purchases, the international prices are only likely to go up—expected to be up to Rs 70 per kg.
The question that arises is that when the millers are paying Rs 13 per kg to the farmer (FRP rate with recovery at 10 per cent) why should sugar be so expensive? Even if we calculate that for every kg of sugar produced the transportation and processing charges come to Rs 5, the cost of production would be a maximum of Rs 18 per kg. If we add another one-third as profit the selling price comes to Rs 24. Then if we count the wholesaler’s/ retailer’s profit sugar should not cross a maximum figure of Rs 30 per kg. Then why Rs 50? Even if they give the sugarcane grower the rate that is remunerative—say, Rs 23 per kg or Rs 230 per quintal for sugarcane—the maximum price to the consumer will come to Rs 40 per kg. This would be still less than the cost of imported sugar or raw sugar.
So there is no reason for sugar prices to sky-rocket as millers continue to pay a price lower than the remunerative price. Though this may vary from State to State the plight of the farmer in the two main sugarcane growing States—UP and Maharashtra—is pathetic. In Maharashtra, sugar mills are cooperatives dominated and controlled by powerful politicians like Sharad Pawar. In Maharashtra, every farmer is tied to a particular cooperative mill and is not free to sell it to any other. So they are at the mercy of the cooperative bosses who keep the prices of sugarcane low. In UP many mills are owned by big business houses like Birla, Bajaj etc.
Depending on imports is no solution to the sugar problem—whether shortage or high prices. The only solution must be to promote sugarcane production by investing in agriculture and subsidising the farmer. In this way not only would the farmer and rural economy flourish, the consumer too would get sugar at a reliable price.
Need for a Pro-active Agrarian Policy
With nine lakh tonnes of imported sugar stuck at the ports since the last month due to the UP Government’s ban on processing it, the Centre has been blaming the Mayawati Government for the high sugar prices. The Mayawati Government, on the other hand, instead of announcing a high SAP, has clamped cases on the millers under the Essential Commodities Act in order to share the booty made by them. The plight of the millions of sugarcane farmers and crores of consumers is not on the mind either of the Congress or the BSP. They are interested in only extracting their share of the windfall profits being made by the millers, cooperatives, big traders and hoarders.
The only policy that would benefit both the producer and consumer is for the government to invest heavily in agriculture and subsidise sugarcane production. Sugarcane production requires large quantities of water, so irrigation projects should be its first focus. Unfortunately the government has systematically been cutting investment in agriculture. Rural development expenditure of the government averaged 14.5 per cent of the GDP in the 1985-90 period. This dropped to eight per cent in the early 1990s and since 1998 it has dropped even further to a mere 5.6 per cent of the GDP. In real terms, there has been a reduction of about Rs 30,000 crores annually in development expenditures on average in the first five years of this century compared to the pre-reform period.
When investment in agriculture should be increasing as it is there that the bulk of our population live, the above figures indicate a massive reduction with disastrous consequences. Rather than become dependent on imports and thereby compromise the food security of the country, the government needs to invest heavily in agriculture (with focus on irrigation) to boost the production of sugarcane and other crops.
To solve the sugar/sugarcane problem the government needs to increase investment in irrigation, subsidise input cost (fertiliser, pesticide, electricity) and ensure a remunerative price is paid to the farmer. To maintain consumer prices it should put a halt on the profiteering, hoarding and illegal methods of the millers and subsidise sugar particularly for the poor. If the government can announce a massive bail-out to the three-to-four oil companies and Air India, why does it shy away from bailing-out 50 million farmers and a few crore masses? The amounts being suggested to the three-to-four oil companies and Air India run up to Rs 20,000 crores, a lesser amount would be needed for the millions of sugarcane farmers.
February 19, 2010 — Correo del Orinoco — In Venezuela, people know what the 3Rs stand for: revise, rectify and re-impulse. Like Karl Marx, who stressed that the revolution advances by criticising itself, President Hugo Chavez has argued that it is necessary to recognise errors and to go beyond them in order to advance.
But who knows what the four Rs of global capitalism are? At the recent meeting in Davos, Switzerland, of the wheelers and dealers of global capitalism, the conference theme was “Rethink, Redesign, Rebuild — Improve the State of the World”. But what did they do? Although we don’t know what happened in their dinner meetings (which, as Adam Smith wisely observed, inevitably end up in a conspiracy against the public), there doesn’t appear to be much sign that they improved the state of the world. Of course, there was never a question that these corporate giants and their faithful servants would rethink the logic of capital — a logic of exploitation, expansion of capital, unending generation of needs and consumerism, and the destruction of what Marx called the original sources of wealth, human beings and nature. How could they? But did they redesign and rebuild in order to improve the state of the world for capital?
Not noticeably. However, that doesn’t mean they have not already been advancing on their real 3Rs. To improve the state of world capitalism, Reverse has become a major theme — especially in the western hemisphere. Given the growing rejection of neoliberalism and global capitalism that has been occurring in Latin America, given the inroads that have been made by a new conception of national sovereignty, international solidarity and socialism for the 21st century, capital sees the need to reverse those advances. Honduras, the Colombian military bases, subversion in Paraguay, Ecuador, Bolivia and Venezuela — all this is capital’s effort to improve the state of its world.
Of course, as we know, global capitalism has had its problems lately — the economic crisis, which is the result of a long process of overaccumulation. And so, it is indeed engaged in a process of redesigning or, rather, Restructuring. It is important to recognise that a crisis in capitalism is not the same as a crisis of capitalism. For a crisis in capitalism to become a crisis of capitalism, you need actors who are prepared to put an end to capitalism. There is, though, no sign of that in the immediate future. And so, like before, capital will proceed to restructure itself. After the depression of the 1930s, capital restructured itself internationally through the Bretton Woods agreements that created the International Monetary Fund and the World Bank. We can already see a similar attempt underway with the shift from the G7 to the G20 — in other words, the incorporation of new emerging capitalist powers such as the BRICs (Brazil, Russia, India and China). And, international capital clearly hopes that through this process of restructuring in which it brings the new important capitalist actors to the head table for international discussions, it will be able to resume its process of growth in accordance with the logic of capital. Reverse, Restructure and Resume — these are the 3Rs that global capitalism wants.
However, there is a fourth R of global capitalism. The very solution to the crisis that capital introduces — that restructuring which brings the emerging capitalist countries to the central committee — implies the right of the latter to be full members, i.e., to achieve levels of consumption and economic development equal to the present levels of the North. Yet we know that the world’s resources and the Earth itself cannot possibly sustain this. And in this situation of true scarcity, how can capitalism solve this?
Capitalism, after all, is a system in which all capitals are trying to expand as much as possible. However, it is not a system in which all its members march in unison; and, as Lenin explained in relationship to World War I, the combination of uneven rates of development and scarcity is a major source of conflict among capitalist countries. In this situation, the new emerging powers want the fourth R– Redivision. Redivision of resources, redivision of industrialisation, redivision of the right to emit carbon — the struggle is on. It is a struggle over access by capital to scarce resources, energy, water and food.
Clearly, in this world of immense inequality, exclusion and starvation, redivision is necessary if we are ever to realise the ideal embodied in the Bolivarian Constitution of Venezuela of the importance of ensuring the overall human development of all people. We want a world, a socialist world, in which (as Marx and Engels stressed) “the free development of each is the condition for the free development of all”. But, capitalist redivision is a process of struggle over the right to exploit. It is a struggle not only among capitals but also against the exploited and excluded of the world.
Who would doubt that this struggle will become more intense as the logic of unremitting capitalist expansion comes up against the reality of natural limits? The slogan writers for Davos were right. We do need to “Rethink, Redesign, Rebuild — Improve the State of the World”. And, we need to redivide, too — to create a world without capitalism. As Fidel Castro and Hugo Chavez continue to remind us, humanity is faced with a critical choice — socialism or barbarism?
[This article first appeared in the February 19, 2010, issue of Correo del Orinoco, the new weekly English-language newspaper published in Venezuela.]
Last week, India’s “wall street journal”, Mint, brought out an interesting editorial entitled, “Proletariat, a misleading idea“ (posted on December 29). In the editorial of a business newspaper meant for stockmarketeers and businessmen, what else do you expect on a conceptual matter? First it will trivialise the concept, mostly because of the authors’ ignorance, but sometimes for conscious propaganda too.
In the editorial a historical snapshot of the usage of the term, “proletariat”, is presented – underdog (during the industrial revolution), obsolete (due to Western welfarism), buried (after the cold war), renewal (during the recent “upswing in industrial unrest”). Ultimately, the argument is simple that the workers’ problems must not be posed as matters of class struggle (“conflict between managements and labour”), rather they should be left entirely to free market “competition between firms” with full freedom to hire and fire, which will eventually resolve everything. And also don’t talk about “rights” because they politicise the workplace, obstructing a free competition between firms. Don’t talk of unionisation – let the bosses continue to scramble freely for golden pie in market growth, and you wait open mouthed for flying crumbs to fall. That’s the message.
This message is understandable, but I was still surprised why such an urgency to call “proletariat, a misleading idea” – does it really need an editorial to be devoted upon? Casually, I continued browsing Mint‘s website for other pieces on labour matters, and I found out the reason. There was an elaborate report on the labour unrest in the auto industry which was posted the previous day (December 28): “The rise of the new proletariat“. It provides a decent backgrounder (decent in comparison to other news reports on labour issues) on the recent industrial unrest in India. In fact, Maitreyee Handique’s (the reporter) has been sensitively presenting the labour side of industrial relations in India. She quotes a Trade Union leader in this particular report:
“Today, my boys are educated. They know how to use computers. They are not going to (sit by) and watch exploitation”.
So these “boys” constitute the “new proletariat”!
Further,
So what’s different about this wave of trade union activity? Timing. It comes as the world is emerging from a financial crisis that marks an inflection point in its industrial development. As the world’s fastest-growing economy after China—and one that sailed through the economic crisis relatively unscathed—India is poised to become one of the powerhouses that pulls everybody else out of the trough.
Take India’s automobile sector—it’s helping to define the future of the global car industry by churning out the low-priced models that are propelling growth as markets elsewhere lose steam. It’s also one of the key fronts on which workers are fighting companies, which explains why the stakes are so high.
And more,
In other nations, such as Malaysia, contract workers are actually paid more because they don’t have job security, said C.S. Venkataratnam, director at the International Management Institute in New Delhi.
“Here (in India), the typical argument is that workers are not qualified,” he said. “In India, we do not pay premium, but discounted wages, for quality.”
Workers say lopsided numbers at many companies – a small regular workforce dwarfed by a larger group of contract hires that’s being constantly retrenched and replenished – render it impossible to register demands and make management responsive.
However, the reporter is determined not to take sides and end the report with an employer’s view:
Kapur said the trouble at the factory was “politically motivated by outside influences”, without elaborating. He accused the unions of trying to create an atmosphere in which industry wouldn’t be able to survive, saying that this had already happened in the two states where the communists are holding power.
“Kolkata and Kerala don’t have industries, and now it’s starting in Gurgaon,” Kapur said.
Despite this balancing between the perspectives of labour and capital in the report, it seems the title “The Rise of the New Proletariat” was quite chilling for the business community, and the very next day the editors, who sensed this, felt the need to target the very two issues that the above report brought out:
“the disparity in wages between contract and permanent employees and difficulties in forming unions at workplaces.”
And they found India’s new chief economic advisor, Kaushik Basu’s statement authoritative enough to correct the damage done.
Further, Mint in the end had to assure its readers:
“Today, the nature of work in modern economies is very different from what it was in the Victorian age. Many workers in the same firm don’t even work together. The idea of a proletariat rests on shared experiences at a workplace. That is a fiction even in assembly line manufacturing today. A gentle draught of economic reason is enough to evaporate a politically evocative expression.”
It seems that the very Idea of Proletariat is dangerous, it smacks of class struggle, it (mis)leads workers to unrest leaving the capitalists distraught.
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?
1) Stagnant industrial (especially manufacturing) wages for the last three decades;
2) An urban-biased approach to development leading to a “prolonged ‘limitless’ supply of labour”.
By bankrupting the rural economy, China has pumped up its urban industrial growth, trade surplus and financial capital.
This is how China lured global capital, even from other East Asian economies, which consequently put China at the helm of East Asian capitalism. But the same strategy has made China dependent on the ups and downs of the global (esp., American) economy. Cheap labour and rural bankruptcy, which constitute the basis of Chinese growth, cannot provide a viable domestic demand structure for the growth to sustain during a global recession. Further, the rise of the Coastal bourgeoisie and their cohorts within the Communist Party will not allow demand stimulus which brings about structural changes challenging their political-economic hegemony.
The “capitalist roaders” in China are fully entrenched within the State and Party, so “class struggle within the party” will not be enough, a new full-fledged Chinese Revolution is what is called for.
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
“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?
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.)
