Globalization and the Impasse of Capitalism Prabhat Patnaik

I feel greatly honoured that I have been asked to deliver the Harold Wolpe memorial lecture for the year 2016. Harold Wolpe was an outstanding thinker who combined political activism for the liberation of the South African people with deep insights into the economic basis of apartheid. I am indeed grateful for this opportunity to pay my tribute to this remarkable person who in my view constitutes a role model for anyone aspiring to be a social scientist. Since a good deal of Harold Wolpe’s theoretical work was concerned with the value of labour power, and hence by implication with income distribution, I thought it would not be inapposite if I use this opportunity to say something on income distribution in the world economy in the current era of globalization.

Many authors have seen the current episode of globalization not as an altogether novel phenomenon, but only as a continuation, after a certain period of interruption, of earlier episodes of globalization. There is some truth in this perception, since capitalism from the very beginning has been a global phenomenon that has forced open, and incorporated into its own orbit, economies from all over the globe. It has never been what “mainstream” economics typically portrays it to be, namely a “closed system” consisting exclusively of capitalists and workers, and developing largely on its own resources, and at best engaging in peaceful international trade at the margin to the mutual benefit of all trading parties.

There is however a fundamental difference between the current episode of globalization and all previous episodes, and this consists in the fact that the current episode is characterized by a mobility not just of capital-as-finance across the globe but also of capital-in-production. And the latter occurs in order to take advantage of the low real wages prevailing in the third world economies to locate activities there, not so much for meeting local demand as for meeting global demand.

This had never happened before, for if it had then the division of the world into an advanced and a backward segment would not have occurred. This division arose because while the encroachment of metropolitan capital into third world economies through colonial or semi-colonial domination had created massive labour reserves in the latter by destroying the basis of local petty production, there had been little absorption of such reserves into modern capitalist production. This was because capitalist production had developed only to a limited extent in these economies owing to the reluctance of metropolitan capital to locate production there to take advantage of the lower wages. The only activities that drew metropolitan capital into the third world were mining and plantations, and the complementary spheres of trade and finance to service such primary commodity specialization, but not manufacturing activities for meeting the global market. The third world economies therefore remained mired in mass poverty which was generated by this specific form of their integration into the orbit of world capitalism.

The export of capital that did occur on a large scale from the capitalist metropolis was into the temperate regions of European settlement like Canada, Australia, New Zealand and the United States, where capital exports went together with labour emigration. European migration into these temperate regions ousted the local inhabitants from their lands, and even virtually decimated them, so that the immigrants who took over these lands enjoyed a high income. This high income ensured a high “reservation wage” for workers both in the countries they came to and also in the countries they came from. (South Africa too was a destination for European migrants but in its case the local inhabitants were not decimated as elsewhere but became instead a subjugated low-wage work-force).

This high reservation wage, indeed the higher reservation wage in the metropolitan countries compared to the third world economies, has been attributed by writers like W.Arthur Lewis (1978) to the fact that England and other European countries had higher land and labour productivity (assuming identical land-labour ratios everywhere) than third world countries like India and China, because of the agricultural revolution that is supposed to have occurred in the former. This view however is untenable. There is little evidence of any agricultural revolution occurring in England or elsewhere (U.Patnaik 2011); on the other hand the fact of European immigrants ousting the original inhabitants in the temperate regions, shepherding those of them who managed to survive into “reservations”, and setting themselves up as farmers with a high per capita income because of the favourable land-man ratio, and thereby ensuring a high reservation wage both in Europe and in the “new world”, is quite indubitable.

The scale of migration was extremely large. W. Arthur Lewis (1978) estimates that fifty million Europeans migrated to the temperate regions of the “new world” in the nineteenth century, while an equal number of Chinese and Indian workers migrated as “coolie” or “indentured” labour to the tropical regions of the world at the behest of metropolitan capital. These two streams were kept separate: one was a low-wage migration (not surprising in view of the massive unemployment created through the destruction of local petty production in tropical colonies and semi-colonies) and the other was a high-wage migration (for reasons already discussed).

These absolute numbers mentioned by Lewis do not give a proper idea of the scale of migration. A better idea is obtained by comparing emigration with the population of the home country in question. Thus from Great Britain which had a population of 14 million in 1815 there was an emigration of 16 million persons between 1815 and 1910; in fact roughly half of the gross addition to the British population each year in this period emigrated to the “new world’[1]. And along with the migration of labour there was as Brinley Thomas (1954) has shown a complementary migration of capital, which brought about an immense diffusion of capitalism from Europe to the “new world” (but not to the third world).

The colonial and semi-colonial economies of the third world were made to aid this diffusion, from which they themselves were excluded, in at least two ways[2]. One was through their being yoked to a triangular pattern of trade. British goods like textiles for instance were not demanded in the “new world”, so that capital exports from Britain, which was the largest capital exporter in the period up to the first world war, could not take the commodity-form of British-produced goods. These goods therefore were sold in markets like India and China; and primary commodities produced by these economies, which were demanded by the “new world”, were exported by Britain as the commodity-form of its own capital exports.

The second way was through the extraction of a surplus by the use of the taxation-system from colonies like India, which was expropriated by Britain without any quid pro quo and which financed British capital exports. An economy like India for instance was not only made to absorb British goods, unwanted in the “new world”, at the expense of its own “de-industrialization” resulting in the displacement of its artisans and craftsmen, but was in addition made to export more goods than it imported, with the export surplus being credited not as its own capital exports but as that of Britain. India’s current account of the balance of payments was made to appear as balanced, thereby denying it any credit for its export surplus, through a whole range of fictitious service import items, which amounted in effect to payments by India for the privilege of being governed by the colonial master. These fictitious service import items were used to offset its export surplus. Despite having the second largest export surplus in the period 1900-1928, second only to the United States, India over this very period did not accumulate a single penny of net claims on other economies; on the contrary it even got marginally into debt with Britain.

What concerns me here however is the manner in which this entire arrangement overcame the aggregate demand problem of metropolitan capitalism. There were three elements involved here. First, there was the diffusion of capitalism, or the pushing of the “frontier”, which provided the basic stimulus to the system. Second, this stimulus could be utilized only because of the fact that the colonial markets were “on tap”[3], so that home produced commodities within the metropolis could be converted into commodities demanded in the “new world” via the colonial markets. Or, if one wishes to decompose the demand problem by drawing a distinction between the problem of aggregate demand and the problem of “disproportionality”, then one can say that the former was resolved by the expanding frontier and the latter by colonial trade. And third, the tightness in the metropolitan labour market produced by mass emigration also meant that real wages could rise alongside labour productivity, which also made the problem of aggregate demand more tractable (Robinson 1963). If such a wage increase had not happened, then a rise in labour productivity in the face of constant or near-constant real wages would have meant an increase in the share of surplus in the output of the metropolis, which, as Baran and Sweezy (1966), relying on the work of Kalecki (1954), have shown, produces a tendency towards over-production because of the higher “propensity to consume” of the wage-earners compared to the surplus earners. This was kept at bay because of the segmentation of the world economy, which made it possible for metropolitan wages to rise with labour productivity, even as third world wages stagnated at some subsistence level owing to the existence of large third world labour reserves. This divergence in real wage movement could be sustained, because neither did metropolitan capital flow into the third world nor was third world labour allowed to flow into the metropolis.

The earlier episode of globalization in short was of a kind that, by its very nature of being wrapped within a colonial system, involving both the “colonies of settlement” (the “new world”) and the “colonies of conquest” (in the third world), did not face a problem of aggregate demand. This is the reason that metropolitan capitalism experienced the prolonged boom of the Victorian and the Edwardian era, or the “Long Boom of the Long Twentieth Century”. The collapse of this boom after the first world war can be attributed to the collapse of the conditions which had sustained it. Of these, three in particular deserve mention: the “closing of the frontier” which Alvin Hansen (1938) was to emphasize; the encroachment of Japan into the Asian markets of Britain which made the triangular pattern of settlement unsustainable; and the world agricultural crisis which reduced primary commodity prices and had the same effect, of making the triangular pattern of settlement untenable.

The Great Depression of the 1930s occurred precisely because metropolitan capitalism in that period did not have any such arrangement in place to overcome its problem of aggregate demand: the old colonial arrangement had ceased to work (in any case, as Rosa Luxemburg had argued, it could provide only a transitory stimulus), and no new arrangement had been created to take its place. Such a new arrangement came into being only in the post-second world war period with the introduction of Keynesian-style State intervention in demand management in each metropolitan country, and above all in the United States, within the overarching framework of the Bretton Woods system. This ushered in what has been called a “Golden Age of capitalism”. And the point to note about the current episode of globalization is that it entails an end of that arrangement, and hence of the “Golden Age”.

State intervention in demand management necessarily entails intervention by the nation-State, and if the nation-State is to have the autonomy to intervene successfully, then finance itself must be “national”, and not globalized. Keynes had been well aware of this and had argued explicitly in an article in The Yale Review of 1933 that finance must be national; and under the Bretton Woods system, of which he was one of the architects, countries could, and did, impose capital controls to ensure that finance did remain national, so that the nation-State had the autonomy to undertake demand management.

The current episode of globalization whose main hallmark is the globalization of capital, including above all of finance capital, has ended this. The autonomy of the nation-State is undermined, since the State has to be careful not to upset the “confidence of the investors” (a euphemism for international finance capital), for otherwise in the new situation where there is unconstrained cross-border capital movements, finance would flow out of the country precipitating a financial crisis. State policy therefore gets determined in accordance with the demands of international finance capital. Since finance capital favours both reduced taxes on the rich (for obvious reasons) and “sound finance”, i.e. keeping the fiscal deficit restricted to a certain small proportion of the gross domestic product (usually three percent these days and not zero as in the days of the Gold Standard), the State’s ability to undertake demand management gets undermined. It can neither run a large enough fiscal deficit, nor rely on the “balanced budget multiplier” to lift the economy out of a state of stagnation or recession. The State’s ability to increase welfare expenditure is also restricted in such a regime of globalized finance for the same reasons, but I am concerned here only with the issue of aggregate demand.

The question that will be raised immediately against this argument, that globalization brings in its train a problem of deficiency of aggregate demand, is the following: even if what is discussed above may be true of other countries from which capital may flow out if the nation-State does not strictly follow the dictates of finance, can it also be true of the United States whose currency is considered to be “as good as gold” by the world’s wealth-holders, and which therefore cannot possibly experience any capital flight? Why should the U.S. not continue then to follow policies of demand management as before, which could also raise the level of activity of the world economy as a whole?

There is an obvious answer to this question. Any action by the U.S. State to boost demand, say through an enlarged fiscal deficit, will necessarily entail the leaking out of a part of this demand in the form of imports from other countries. In the absence of greater protectionism in the U.S., any attempt by its State to stimulate domestic activity will necessarily therefore entail an increase in its external indebtedness, and that too for generating employment in other countries, like China. Since the U.S State continues after all to be a nation-State, it can scarcely be expected to get into debt for generating employment elsewhere. This is why within the current regime of globalization, i.e. in the absence of U.S. protectionism, even the country that should not fear any capital flight if it pursued an expansionary policy, is reluctant to do so.

A deeper question would also be asked of the above argument. And that is: why should finance capital insist on “sound finance” when the effect of such “sound finance” is to prolong a state of recession and stagnation, which discredits, and hence threatens, the system as a whole? This demand of finance for balancing budgets is not new; it has always been there. It was there even in 1929 when the British Treasury, under the influence of the City of London, had turned down Lloyd George’s proposal, made on Keynes’ suggestion, to start a public works programme, financed by a fiscal deficit, to take care of the growing unemployment which had already reached 10 percent by that date (Robinson 1962). Why should there be this demand at all?

The answer to this question, of why finance capital is opposed to fiscal deficits, goes beyond narrow economic considerations, such as the fear of inflation or the fear of an exchange rate depreciation which finance may entertain in the event of a stimulation of activity. Such fears may conceivably arise near the top of a boom, but not in the midst of a recession; and while such fears may be legitimate in the case of some countries, they cannot possibly explain the universal opposition of finance to fiscal deficits, an opposition described by Joan Robinson (1962) as “the humbug of finance”[4]. This opposition I believe springs rather from a fear of the system’s losing its social legitimacy. If State intervention, bypassing the route of boosting the “animal spirits” of capitalists through providing “incentives” to them, becomes the established procedure for expanding the level of activity, then the question will inevitably be raised: why do we need the capitalists at all, why not have State control over production? Keynesian-style State intervention in demand management in other words constitutes a violation of the standard “rules of the game” of the system; and even though, in the aftermath of the second world war, finance capital may have acquiesced in such a violation, when its very existence was under threat, it re-establishes these rules whenever it gets an opportunity to do so, such as what globalization of finance in a world of nation-States has provided.

There is a second way in which the current globalization generates a serious problem of deficiency of aggregate demand (P.Patnaik 2011). Its hallmark, we have seen, is to overcome the earlier segmentation of the world economy, which means that the real wages in the advanced capitalist economies are no longer immune to the baneful consequences of third world labour reserves. As long as these reserves last, not only do third world wages remain tied to a subsistence level, but even metropolitan wages, while they do not exactly come down to equal third world wages, cease to increase as before because of competition from cheap third world labour. Even though labour is still not free to move from the third to the first world, since capital is now willing to move from the first to the third world to take advantage of the wage-differential, this very fact restricts wage increases in the first world.

The vector of world real wages therefore does not increase even as labour productivity increases everywhere, causing an increase in the share of surplus in world output. In the United States for instance between 1968 and 2011 according to Joseph Stiglitz the absolute level of the real wage of a male worker has not increased (if anything it has decreased marginally), even though there has obviously been a massive increase in labour productivity over this long period.

A rise in the share of surplus in total output has the effect ceteris paribus of reducing aggregate demand, as mentioned earlier, for asimple reason highlighted by authors like Kalecki (1954), Steindl (1976), and Baran and Sweezy (1966), namely that the consumption-income ratio is higher for wage-earners than for surplus earners. Such a shift therefore has the effect of reducing aggregate consumption, and hence aggregate demand for any given level of investment. Since the actual investment in any period is based on investment decisions taken in the past, and hence is more or less given, such a shift therefore tends actually to reduce the level of aggregate demand and hence output, which in turn lowers investment in the next period, causing a cumulative tendency towards stagnation. Such a tendency becomes even more pronounced when the increase in the share of surplus is not once-for-all but continuous.

It follows therefore that the current globalization, apart from preventing State intervention in demand management and hence giving rise to a problem of aggregate demand for that reason, also tends to reduce aggregate demand by raising the share of surplus in world output.

One aspect of this increase in the share of surplus in world output, which manifests itself within every country, since labour productivity rises everywhere even as real wages remain stagnant everywhere, has received much attention; and that relates to the growing inequality in income and wealth across the globe. Of course the rise in inequality has not been analyzed along the lines outlined above by those like Thomas Piketty (2013) who have written about it. They have used other explanations, such as for instance (in Piketty’s case) the fact that the rate of profit has exceeded the rate of population growth. But in general such theoretical explanations have been either logically or empirically untenable, which is also true of Piketty’s own explanation (Patnaik 2014). A more persuasive explanation of the observed increase in income and wealth inequality within each country in the world lies in the fact that globalization has kept down wages everywhere even as labour productivity has gone up everywhere.

Some have argued that since economies like China and India have grown rapidly during this era of globalization, even though inequalities may have increased within them, there has been a reduction in inequalities across the countries of the world. But, because of the significant increase in inequalities within these countries, if we take say rural and urban China as two separate countries and likewise rural and urban India, then we are likely to find that inequalities, as measured for instance by the Gini coefficient, across the countries of the world so defined, have also increased. This is what one would expect since the bulk of the labour reserves in the world are located in the rural areas of these vast economies. The point I wish to make however is that while the social and political significance of the increase in inequality, such as  its effect in enfeebling democracy, has received attention, its economic effect in terms of causing stagnation and recession through a reduction in aggregate demand has hardly been recognized. (In Piketty’s analysis the problem of aggregate demand does not even enter, since it is based on neo-classical growth theory which assumes Say’s Law that supply creates its own demand).

Of course if the growth process in the era of globalization could significantly exhaust the labour reserves then this increase in inequality, and with it the tendency towards stagnation, should disappear. But paradoxically the fact of growing inequality itself produces a growth process whereby the labour reserves, far from disappearing, tend to increase in relative size. To see why this is so, let us for a moment forget about the tendency towards stagnation that growing inequality produces (this tendency would strengthen the argument presented below) and assume that the consumption-income ratios of the wage earners and the surplus earners are equal.

Now a dollar shifted from the poor to the rich, even if it generates the same consumption expenditure, entails expenditure on very different sets of commodities. Typically expenditure by the rich is on goods and services which are much less employment-intensive than those which the working people demand. This is because technological progress under capitalism in the form of process and product innovations has the character generally of economizing on labour (which after all is why labour productivity increases over time), and the rich demand more up-to-date goods than the poor. A rise in the share of surplus therefore, which entails a shift in income distribution from the working poor to the rich, raises the time-profile of productivity along any particular growth path. But if there is a continuous increase in the share of surplus, then for any given rate of growth of output the time-profile of labour productivity itself keeps increasing from one period to the next, i.e. the observed rate of growth of labour productivity itself keeps increasing over time. Since the rate of growth of employment is merely the difference between the rate of growth of output and the rate of growth of labour productivity, this implies that for any given rate of growth of output, employment growth keeps slowing down over time. With any given rate of growth of the work-force therefore if employment growth, to start with is not such as to prevent a rise in the share of surplus, it will never do so over time and the relative labour reserves will eventually keep increasing in size.

It follows therefore that no matter what the rate of growth of output, if it does not prevent an increase in the share of surplus at all, then it necessarily tends eventually to enlarge the relative size of the labour reserves for any given rate of growth of the work-force. The share of surplus in such a case keeps increasing, and the growth process leads not just to a perpetuation of the existing size of the labour reserves relative to the work-force but to an increasing relative size of such reserves.

I have so far assumed a given rate of growth of output. In fact however, as we have seen, even the maintenance of this growth becomes impossible owing to the tendency towards over-production arising from the rise in the share of surplus. It follows therefore that the third world labour reserves never get exhausted if the share of surplus rises over time; on the contrary the relative size of labour reserves increases despite the fact that capital-in-production in the current era of globalization moves to third world economies from the metropolitan centres to meet global demand.

This phenomenon is further compounded by another factor. The tendency under capitalism is to destroy pre-capitalist petty production. But in the post-second world war years of dirigiste development in the third world, the governments that came to power in the newly-liberated countries tended to protect petty producers from going under, in part-fulfillment of the promises made during the anti-colonial struggle. With the end of dirigisme and the introduction of neo-liberal policies, the spontaneous tendency of capitalism to destroy petty production reasserts itself, as the State, under compulsion to accede to the demands of globalized finance for maintaining its “confidence”, ceases to provide petty producers with the support and protection needed for their viability. The petty producers displaced in this manner from their traditional occupations seek employment outside, which adds to the supply of the job-seeking work-force in the capitalist sector. But with meagre employment generation in the capitalist sector, these displaced petty producers only add to the relative size of the labour reserves.

Hence the proposition that the current regime of globalization is associated with a tendency towards stagnation remains unimpaired. Or, putting it differently, the current episode of globalization which entails a new-found mobility of capital to take advantage of the low third world wages and which therefore is presented as an achievement of capitalism, is actually the harbinger of a structural crisis, an impasse for capitalism. This impasse may get camouflaged, and indeed did get camouflaged for some time, by the formation of “bubbles” in asset prices, first the dot-com bubble and later the housing bubble, which have the capacity to boost aggregate demand. “Bubbles” in short constitute the one possible antidote to the structural crisis, but with their inevitable bursting the crisis gets exposed. And since new bubbles cannot be made to order, the crisis that their bursting creates may continue for a protracted period of time, as we are seeing today.

The crisis following the bursting of the housing “bubble” which began in 2007-08 continues unabated to this day in the advanced capitalist world, and is even spreading to the erstwhile fast-growing economies like India and China. The point I am trying to make in short is that the current phase of capitalism witnesses not just transient crises of the familiar kind, but something fundamentally different, which is in fact a veritable impasse for capitalism. It is comparable to the 1930s crisis but even more serious in the sense that there are no ideas whatsoever on how it can be overcome.

This impasse has brought great distress to the working people all over the world. In the advanced capitalist countries not only have real wages stagnated, as we have seen, but employment too has declined with the unleashing of the protracted crisis. In the third world economies, the destruction of petty production, which constitutes a process of “primitive accumulation of capital”, the absence of employment growth and the consequent increase in the size of the relative labour reserves, and the stagnation of real wages of even the employed workers that has followed, combine to cause acute distress among the working people.

Alleviating this distress requires intervention by the State. But in the absence of a World State, or even the prospects of one, which could effect Keynesian-style demand management at the world level, even against the wishes of globalized finance capital, the only possibility that remains is for the nation-State to undertake a similar intervention by delinking the national economy from globalization. This would require however a change in the class character of the State, since it would entail confronting international finance capital.

The Left that should be leading the struggle for such a change, appears everywhere unfortunately to believe that the current globalization, dominated by international finance capital, can simply be carried forward to a higher form of globalization that has shaken off this domination, without any transitional delinking by any national economy. Despite its criticism of current globalization therefore it sees any delinking from it as reactionary, while at the same time lacking any alternative agenda for improving the conditions of the working people. This has left the way open for a growth of fascist forces who explain the distress of the people not as the working of the system that has culminated in the current globalization but by invoking an evil “other”: the immigrant, the Muslim, or the foreign worker who “steals jobs”.

These forces are opposed not to the globalization of capital but to immigration (and, possibly, to the unrestricted imports of foreign goods). The Left’s endorsement even of the current globalization has the unfortunate effect therefore of making growing numbers of working people repose their faith in these racist and fascist forces. A polarization is thus being produced where the Left and the Liberals are on the same side as international finance capital, as proponents of globalization, but with no agenda for improving the people’s condition, while the Right appears to offer an agenda , though it is only a racist or a fascist agenda.

This dichotomy is unfortunate. In cases, such as Bernie Sanders, where the Left has presented itself as being against the hegemony of international finance capital and the globalization dominated by it, it has struck a chord with the working people and posed a challenge to the fascist forces. But much of the Left seems as yet not to have grasped the need for delinking from globalization, because it has not grasped the impasse that capitalism has run into. It is for this reason that I have devoted the current lecture to this issue.

Thank you.


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[1] These figures are taken from U.Patnaik (2012)

[2] The discussion in this paragraph and the one that follows is based on U.andP.Patnaik (2016).

[3] This expression is used by S.B.Saul (1960).

[4] See also P.Patnaik (2002)