Friday, June 24, 2022
03 Mar 2009 Capitalism, Socialism and Crisis
Tue, 03 Mar 2009
Capitalism, Socialism and Crisis
By Prabhat Patnaik
http://www.politicalaffairs.net/article/articleview/8201/
Original source: People's Democracy (India)
A common view of the current financial crisis of capitalism holds
that it is essentially an aberration. Some attribute this aberration to
specific mistakes committed in the past, for instance by the US Federal Reserve
with regard to monetary
policy. Some hold the lack of adequate regulatory mechanism as being
responsible for this aberration. Paul Krugman, the current year’s Nobel
laureate, blames it on
insufficient supervision of the financial system. And even Joseph Stiglitz,
the well-known radical economist and Nobel laureate, characterizes it as a
“system failure,” a term which makes the crisis a phenomenon that in principle
could have been avoided with impunity.
This entire perception however is untenable. The crisis is a result not of the
failure of the system but of the system itself; it is a part of the mode of
operation of contemporary capitalism rather than being unrelated or extraneous
to it.
Massive speculation
In a “free market” regime, asset markets tend to be subject to
speculation. Speculators buy assets not because of the yield on these assets
but because they expect its price to appreciate in the coming days. They have
no long term
interest in the assets and are concerned exclusively with capital
gains. Since buying today to sell tomorrow entails carrying the asset during
the intervening period for which a “carrying cost” has to be incurred, the
assets most suitable for speculation are those whose carrying costs are low;
and these are typically financial assets
which have virtually zero carrying costs (requiring only a few taps on
computer keys to effect all necessary transactions). Financial asset markets
therefore are
always subject to massive speculation.
Speculation generates bouts of euphoria or “speculative excitement”
which have the cumulative effect of pushing up asset prices. An initial rise in
some asset prices, caused no matter how, gives rise to expectations of a
further rise, and hence
to an increase in the demand for the assets in question which actually raises
their prices further; and so the process feeds upon itself and we have asset
price “bubbles.”
Such “bubbles” typically characterize financial assets, which, as already
mentioned, are particularly prone to speculation; but they are not confined to
financial assets
alone (as the housing market “bubble” in the United States has just
demonstrated).
Such “bubbles” have an obvious impact on the real economy. The
rise in asset prices fed by speculative euphoria improves for individuals who
own these assets the estimation of their wealth position, and hence causes an
increase in
their consumption expenditure, and thereby in employment. Likewise such a rise
in asset prices, where the assets in question are producible, causes an
increase in
investment expenditure on these assets, which leads to their larger
production, and hence to larger employment. In short, speculative euphoria in
the asset markets makes
the boom in the real economy, stimulated by whatever had caused the initial
rise in asset prices, more pronounced and prolonged.
Precisely because of this however if for some reason the asset price
increase wanes or comes to a halt, speculators attempt to get out of the
assets in question causing a crash in the asset prices. This causes a fall in
aggregate expenditure
on goods and services; a collapse in the state of credit, as banks face
insolvency; and a possible collapse even in the inclination of depositors for
holding bank deposits (since they fear banks’ insolvency), as had happened
during the Great Depression. In short
there is a collapse of the state of confidence all around, and hence a
corresponding increase in liquidity preference; i.e. there is a disinclination
to hold any asset other than
pure cash, or in extreme cases only currency, and of course claims upon the
government, which is considered to be the only safe and reliable borrower. Not
all crises display
this severity; but to a greater or lesser extent these features mark any
crisis.
Speculation therefore has the effect of making the boom more pronounced
and prolonged; but it has also the effect of precipitating a severe crisis, as
distinct from a mere cyclical downturn. In the absence of speculation the boom
in the real economy will
be a much more truncated and tame affair. But precisely because it is not a
tame affair, it is followed by a crisis.
Two conclusions follow from the above analysis. First, since speculation
is endemic to modern capitalism, where financial markets play a major role,
speculation-engendered euphoria and the consequent pronounced booms, together
with the crises
that invariably follow, are also endemic to modern capitalism. “Bubbles”
constitute in other words the mode of operation of the system. “Bubbles,”
together with the crises that
follow their collapse, are not a “system-failure”; they are the system.
Secondly, if “bubbles” are to be eliminated and speculation is to be curbed,
then it is not enough to put
in place some regulatory mechanisms; an alternative instrument for generating
pronounced booms in the real economy has to be found, for otherwise the economy
would remain
perennially sunk in stagnation and large-scale mass unemployment.
The alternative instrument suggested by John Maynard Keynes, the
well-known English economist, was State intervention through fiscal measures to
ensure that the level of demand remained as close to full employment as
possible. Keynes’ suggestion, made in the 1930s during the Great Depression,
was strongly opposed by finance capital,
which always opposes all State intervention that does not promote its own
exclusive interest. The Keynesian remedy got accepted only in the post-war
period when the
balance of class forces had shifted, with the working class, which had made
immense sacrifices during the war, acquiring greater social and political
weight, and finance capital,
experiencing a corresponding weakening of its position, forced to make
concessions.
Over time however this balance changed once again. “Centralization of
capital” and the formation of larger and larger blocs of finance capital,
during the period of Keynesian demand management itself, forced open the
barriers imposed on cross
border financial flows. Finance capital consequently acquired the nature of
international finance capital, through a process of “globalization of finance.”
Since the whims of
international finance capital necessarily had to triumph over the autonomous
predilections the nation-State, in order to avoid capital flight, Keynesian
“demand management”
was rejected, and neo-liberal capitalism emerged triumphant again, bringing
back the era of speculative financial crises, leading to real crises, in the
capitalist world. This is the
phenomenon we are currently witnessing, a phenomenon that has been compared
with the Great Depression of the 1930s.
Socialist economy immune to crises
One of the hallmarks of the 1930s Great Depression is that the
Soviet Union, the only socialist economy of the time, had been completely
unaffected by it. In fact, when capitalism had been afflicted by the severe
crisis, the Soviet Union
had experienced such unprecedented economic construction that it had completely
got rid of unemployment. This fact, as is well-known, had so impressed a
whole generation of Indian freedom fighters, like E. M. S. Namboodiripad, that
they had embraced Communism because of it.
This contrast arises owing to a fundamental difference between the
mode of operation of the two systems. A socialist economy is fundamentally
immune not just to speculation-induced crises but to all crises arising from a
deficiency
of aggregate demand. This fact is recognized even by staunch opponents of
socialism like the Hungarian economist Janos Kornai who calls capitalism a
“demand-constrained system” and socialism a “resource-constrained system” where
the available resources are fully utilized without being constrained by
insufficient demand.
A socialist economy of course has the usual fiscal instrument
suggested by Keynes for overcoming deficiency of aggregate demand, unlike a
capitalist economy where the use of this instrument requires overcoming
opposition from
finance capital, and where, even when the instrument is perchance used, there
is a limit to its use arising from the fact that the system, being based on
antagonism,
needs a sufficiently large reserve army of labour to prevent inflation and
maintain “work discipline.” But even apart from this, a socialist economy can
overcome deficiency of aggregate demand in another way which brings out its
basic character.
In any economy where in any period the money wages are given,
the production of a certain output requires a certain unit cost of production
to be incurred. The term “deficiency of aggregate demand” or “insufficient
demand” simply
means that the level of demand in the economy is such that this output can be
sold only at a price that falls below this unit cost of production plus the
customary profit margin.
When this happens, then in a capitalist economy firms cut back on output, so
that there is unemployment; and this gives rise to a further reduction in
demand
since the workers’ demand shrinks owing to unemployment; and this causes a
further reduction in output and employment; and so the process, referred to as
the “multiplier”
effect of the initial output/employment decline, goes on and the economy is
caught in a crisis.
In a socialist economy however since firms are socially owned, the
State can issue a directive asking them to lower prices when they initially
find that the demand for output at the base price, i.e. at the price equal to
the unit cost plus profit
margin, is less than the output. While issuing this directive it can assure
the firms that any losses they make will be covered from the State budget. In
such a case, firms
simply lower their prices to clear the market, and there is no question of any
unemployment to start with, and hence no question of any “multiplier effect.”
Putting it differently,
in a capitalist economy any decrease in demand gives rise to “output
adjustment” and hence “employment adjustment”; in a socialist economy it can
give rise only to “price adjustment” and keep output unchanged.
Why does this difference arise? When price adjusts downwards, since
the money wage rate is given, there is an increase in the real wage rate. So,
a socialist economy, faced with a decline in aggregate demand, gets rid of it
by raising real wages
of workers, i.e. by raising the demand of the workers. But a capitalist
economy, precisely because it is based on class antagonism, where the slightest
increase in the wage
rate is bitterly opposed by capitalists, will never raise real wages to get
rid of demand deficiency. This is why any such deficiency gives rise to output
adjustment, and hence mass unemployment.
But now we come to the real crux of the matter. It was mentioned
above that the socialist State, while directing firms to reduce prices to clear
markets, would assure them that any losses they incur would be covered by the
State budget, i.e.
that they would get a State subsidy to cover their losses. The question may be
asked: how does the State finance these losses? And the answer interestingly is
that for all the firms taken together there will be no losses. In other words,
while the State issues this directive it will never be actually called upon to
make any additional budgetary provisions for subsidies. True,
firms in the aggregate will make less profits after price adjustment than they
otherwise would have done in the absence of the original deficiency of
aggregate demand; but they will make profits in the aggregate all the same. The
State may at the most have to divert the profits
of some firms to cover the losses of others, but it will have to make no
additional provisions. This follows from the fact that since profits in any
period in a socialist economy
are more or less synonymous with the savings of the economy, and since
(ignoring external borrowing/lending), investment in any period must equal
savings,
as long as investment remains positive, profits in the aggregate must remain
positive no matter what the level of aggregate demand.
A socialist economy, being both free of antagonism (so that real
wages can be raised) and free of anarchy (so that some firms’ profits can be
diverted to cover others’ losses), has thus a mode of functioning that makes it
in principle
immune to crises, caused by the deficiency of aggregate demand, which afflict
capitalism.
In the present context
So far we have discussed the inner workings of a socialist
economy that is unconnected with world capitalism through trade and financial
relations. Since the Soviet Union in the 1930s was unconnected with world
capitalism, and even later had only tenuous links, it remained actually immune
to crises of aggregate demand. But what can be said of a socialist economy that
is closely linked to the capitalist world through trade and financial
relationships? Does such an economy continue to remain immune to crises of
aggregate demand, especially those emanating from the capitalist world?
In an economy where all important means of production are socially
owned, the answer in principle should still be “yes.” When exports of such an
economy decline, it is always open to it to raise domestic demand, either
through the fiscal route suggested to capitalism by Keynes, i.e. through larger
State expenditure, or through larger workers’
consumption via a rise in the real wage rate, caused by the lowering of prices
for a given money wage rate, as discussed above. Since the rationale of the
socialist economy’s
participation in the world market is that it has generally lower prices than
the capitalist world (at the prevailing exchange rate), which after all is why
it is able to out-compete the capitalist countries and have burgeoning trade
with them, any further lowering of its domestic prices in
response to the reduced demand owing to world recession, should cause no
“leakages” in the form of larger imports. Such reduction in other words should
boost its own
domestic demand, and, if anything, even help somewhat in countering export
decline. Likewise, if it provided a larger fiscal stimulus, as China has
announced it would, then
the main impact of such a stimulus should be on its own domestic demand. In
short the socialist weapons against crises mentioned earlier remain intact even
when the
socialist country has trade relations with the capitalist world.
Of course switching from export production to production for the home market
may take some time, during which there may be transitional unemployment, but
this is very
different from the unemployment encountered in capitalist countries during a
crisis.
The problem however may arise from a different source, namely when
in the process of entering into relations with capitalist countries, the
socialist economy has also accommodated within its midst a large private
sector, owned by
powerful capitalists from home and abroad. There would be resistance from them
to the use of the standard socialist weapons against crises, just as there is
resistance from capitalists in capitalist countries to the use of similar
weapons, and indeed for the very same reasons.
It follows in such a case that the capacity of the socialist economy to thwart
a crisis arising from the deficiency of aggregate demand, depends upon the
strength of the
socialist State in confronting the opposition of the internal capitalists to
the socialist measures against the crisis.
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