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Please visit monthlyreview.org for complete details of the award. PAST RECIPIENTS Imperialism in the Twenty-first Century:

Globalization, Super-Exploitation, and Capitalism’s Final Crisis John Smith The Age of Monopoly Capital:

Selected Correspondence of Paul A. Baran and Paul M. Sweezy, 1949–1964 Edited and annotated by Nicholas Baran and John Bellamy Foster Value Chains: The New Economic Imperialism Intan Suwandi Copyright © 2021 by Utsa Patnaik and Prabhat Patnaik Published by Monthly Review Press All Rights Reserved Library of Congress Cataloging-in-Publication Data available from the publisher ISBN paper: 978-158367-890-9 ISBN cloth: 978-1-58367-891-6 Typeset in Bulmer Monotype MONTHLY REVIEW PRESS, NEW YORK monthlyreview.org 5 4 3 2 1 Contents Preface | 7 PART 1 1 A Money-Using Economy | 11 2 Money in Some Theoretical Traditions | 28 3 The Marxian System and Money | 40 4. Capitalism and Its Setting | 54 5 Increasing Supply Price and Imperialism | 68 PART 2 6 Periods in Capitalism | 85 7 The Myth of the Agricultural Revolution | 101 8 Capitalism and Colonialism | 115 9 Colonialism before the First World War | 128 10 Further on Colonial Transfers and Their Implications | 151 PART 3 11 The Unraveling of the Colonial Arrangement | 173 12 A Perspective on the Great Depression | 186 13 Public Policy and the Great Famine in Bengal, 1943–44 | 200 PART 4 14 Postwar Dirigisme and Its Contradictions | 221 15 The Long Postwar Boom | 236 16 The End of Postwar Dirigisme | 249 PART 5 17 The Neoliberal Regime | 267 18 Inequality and Ex Ante Overproduction | 284 19 Capitalism at an Impasse | 298 PART 6 20 Capitalism in History | 315 21 The Road Ahead | 329 Notes | 341 Index | 363 For Akeel Bilgrami and C. P.Chandrasekhar part 4 Postwar Dirigisme and Its Contradictions C apitalism emerged from the war facing a serious threat to its sur- vival. The socialist bloc had expanded greatly through the Red Army’s march across Eastern Europe; and though the left lost the Greek civil war, partly no doubt as a consequence of the Yalta agree - ment that prevented adequate Soviet support for the revolution, a “Soviet threat” nonetheless loomed large over Western Europe, where in any case the Soviet Union enjoyed much goodwill because of its epic strug - gle against Nazi Germany. The working class in Western Europe, which had made enormous sacrifices during the war, was determined not to go back to the prewar years of Depression and unemployment. An expres - sion of this determination was the defeat of the Winston Churchill–led Conservative Party in the postwar British elections. It was also clear that the old imperialist powers of Europe could no longer hold on to their colonial possessions in the face of the postwar upsurge of national liberation struggles. Many of these struggles were led by the Communists, but whether they were or not, they almost invariably enjoyed the support of the Soviet Union.

The Restructuring of Capitalism Capitalism’s response to this threat to its survival was twofold. One was to start the cold war against the Soviet Union; the other was to restructure CHAPTER 14 222 CAPITAL AND IMPERIALISM itself in several ways, as a means of rolling back the socialist challenge, by making concessions that it otherwise would have recoiled from. There were at least three major spheres where such concessions were made.

The first concession was the institution of electoral democracy based on universal adult suffrage, which, even in France, the country of the classic bourgeois revolution, occurred only in 1945. Many believe these days that electoral democracy with universal adult suffrage is a “natural” accom - paniment of capitalism. This, however, is untrue; its realization occurred predominantly in the postwar years and only after long years of struggle.

(Even in Britain, women had got the vote only in 1928, and still some property-based restrictions on suffrage had remained.) The second concession made by capitalism was political decoloniza - tion. In East and South East Asia where the United States had become the preeminent power after the defeat of Japan, it sought to place itself in the position occupied earlier by the old colonial powers and thereby prolong imperial occupation. But this policy, which had disastrous consequences in Korea and Vietnam, could not succeed; the process of political decol - onization could not be halted, though in many instances, such as West Africa, it still remains incomplete in crucial ways to this day, as French troops continue to remain stationed there. Yet more important and contentious than political decolonization was the process of economic decolonization, that is, former colonies’ acquir- ing control over their own natural resources, which metropolitan capital had seized during the colonial era. Economic decolonization was bitterly fought by the metropolitan powers, with coups against third world leaders, like Mossadegh in Iran and Arbenz in Guatemala, who dared to national - ize their country’s resources. There was a full-fledged invasion of Egypt by a joint Anglo-French force when Nasser nationalized the Suez Canal.

The Soviet Union’s role was particularly important in making economic decolonization possible. Toward this end it helped to build up the public sector in many third world countries for developing and processing their natural resources, the control over which was snatched back from metro- politan capital. The third concession that capitalism had to make was the institution of state intervention in demand management, as had been advocated by PoSTwAR DIRIgISME AND ITS CoNTRADICTIoNS 223 Keynesianism. State intervention through monetary policy had always been there, as was the use of the fiscal instrument for stimulating demand by inducing capitalists to spend more. What Keynesianism had advocated, however, went further, namely the direct intervention by the state, through its own spending, to maintain aggregate demand close to full employment output. This got instituted in the postwar period. It may appear odd at first sight to call the maintenance of a high level of aggregate demand through state intervention in this manner, which keeps up employment, output and profits, a concession on the part of capital. It represents after all a “Pareto-improvement” compared to a state of large- scale involuntary unemployment, in the sense that nobody is worse off through such improvement, while some, if not all, are better off, which includes the profit-earners. Then why should capitalists object to such intervention in the first place? Even capitalists, in other words, benefit from an increase in state expen - diture that is meant to increase aggregate demand, by getting larger prof - its. If the increase in state expenditure is financed by a fiscal deficit, then the rise in profits caused by it is obvious. But even if the increase in state expenditure is financed entirely through taxes on profits, there need not be a fall in post-tax profits compared to the initial situation if the workers consume their entire income. In this case, moreover, since capacity utiliza - tion improves, so does private investment over time , and hence profits.

Why, then, should capitalists object to state intervention in demand man - agement through fiscal means, that is, through enlarged state expenditure? The opposition of capitalists to state intervention through fiscal means for raising employment, certainly as long as unemployment remains greater than the “inflationary barrier,” appears at first sight to be inexplica - ble. And yet, there can be little doubt about the reality of such opposition, which has manifested itself time and again. There was the opposition to Lloyd George’s 1929 plan of fiscal-deficit-funded state-run public works for overcoming mass unemployment, which predated the “Keynesian Revolution.” And in the 1930s, when Roosevelt’s New Deal had started a recovery in the United States, it was soon abandoned under the pressure of financial interests precisely because of its success, plunging that country once again into a recession in 1937. 224 CAPITAL AND IMPERIALISM In chapter 12, we argued that this opposition is not of an economic but of an epistemic character. Direct state intervention in demand man- agement, which bypasses the capitalists, undermines the social legitimacy of the system. The capitalists’ class instinct therefore tells them to oppose such intervention, to project an intellectual position that helps to enforce an “epistemic closure,” where there is no scope for looking beyond the capitalists to generate a recovery. This way, there is no chink left for ques - tioning the social legitimacy of the system. In the immediate postwar period capitalism, faced with a threat to its survival, had little choice before it. It had to put up with Keynesian demand management through state expenditure, both in the United States and in Europe, because of which the postwar era saw capitalism achieve high rates of employment that were, over a comparable period of time, quite unprecedented in its entire history. Such state intervention in demand management required, to start with, an appropriate international monetary arrangement, one the Bretton Woods system provided.

The Bretton Woods System The presumption behind state intervention in demand management was that the pursuit of private rationality by economic agents produced in the aggregate an outcome that was not only socially irrational but also inimical to private interests, which a situation of involuntary unemployment evi - dently was. The state was seen, therefore, not as an entity having some specific interest of its own and entering the fray to achieve it, but as the promoter of the social interest. It effected an intrusion of social rationality into a sphere characterized by the pervasive, and futile, pursuit of private rationality. An obvious necessary condition for this to happen was that the state must have the autonomy to pursue policies it considered appropriate. The state that is supposed to pursue such policies, however, happens to be a nation-state. For it to have such autonomy, not only must it not be a prisoner of finance capital, but it also should be able to pursue policies that are not necessarily to the liking of finance capital. For this it is neces- sary that cross-border flows of finance must be restricted, for, if finance is international and can move across national boundaries at will, then the PoSTwAR DIRIgISME AND ITS CoNTRADICTIoNS 225 nation-state’s writ cannot run against it, as it would simply quit the coun - try en masse, precipitating a crisis. Keynes, we saw earlier, had expressed this idea in an article in The Yale Review in 1933, even before The General Theory had been written, where he had said, “. . . above all, let finance be primarily national.” 1 The Bretton Woods system that was set up in 1944 gave expression to this idea. It was a regime where controls were imposed by the nation- states over cross-border capital flows, including above all the cross-border flows of finance, so that the state could intervene in demand management to push economies closer to full employment. But even if demand could be “managed” by the state, there still remained a problem relating to the balance of payments. Moving close to full employ - ment could still be thwarted by the emergence of a current account deficit on the balance of payments that was unsustainable. Of course, since the deficits of all countries taken together must add up to zero, if the surplus countries could expand their domestic demand, if not through an increase in domestic employment (for they are likely to be close to full employment anyway) then at least through an increase in domestic consumption at that given level of employment, then the deficit countries could automatically get rid of their deficits without having to curtail their domestic activity. The Bretton Woods arrangement, however, could not institute such adjustment on the part of surplus countries. The United States, then a surplus country, opposed any provision that would force adjustment upon surplus countries to get rid of their surpluses. Under the Bretton Woods system, therefore, it was only the deficit countries that were obliged to carry out adjustment. And they were allowed a whole range of instruments for this purpose, from exchange rate depreciations to tar - iffs and quantitative restrictions. Exchange rate depreciations, of course, would be of no avail if they were followed by retaliation by other coun- tries. To prevent such retaliation and hence to curtail the absolute rights of countries to undertake depreciations, the Bretton Woods system insisted that these could be effected only with the permission of the IMF. It was, in short, a fixed nominal exchange rate system with capital and trade controls (and hence a system of multiple effective exchange rates) where the nominal rate could be adjusted with the permission of 226 CAPITAL AND IMPERIALISM the IMF. And within this system, nation-states could undertake demand management measures.

Though Keynes was no means the sole or even the principal author of this arrangement (the U.S. representative at Bretton Woods, Harry White, had a powerful role), an inkling of its theoretical underpinnings can be obtained from certain remarks of Keynes in The General Theory. Holding that a “competitive struggle for markets” as a cause of wars “probably played a predominant part in the nineteenth century,” he wrote that under the system of domestic laissez faire and an international gold standard, which prevailed, there were no means available to governments other than a competitive struggle to reduce domestic unemployment. Keynes, as we have seen, was factually wrong. The latter half of the nineteenth century was a period remarkably free of wars over markets (since Britain kept its markets open to its rivals and yet kept up its aggre- gate demand and managed to balance its payments through the control it exercised over its colonies). Indeed, between the Crimean War and the First World War, the only wars between European powers were over the German and Italian unifications, and these were not, primarily, struggles for markets. But what concerns us here is his theoretical position, namely that a regime of balanced budgets and fixed exchange rates leaves no scope for any internal mechanism for increasing employment. What the Bretton Woods system did was to negate both. Budgets did not have to be bal - anced, for which control over financial flows was necessary, and exchange rates became subject to adjustment.

Contradictions of the Dirigiste Arrangement Colonialism had been ideal from the point of view of capitalism, because not only did the colonies provide a market via the replacement of local craft production, but also because the same act of destruction released raw mate - rials for capitalist use. The act of finding a market, in short, was simulta - neously an act of income deflation in the colonies through the destruction of local crafts (supplemented, of course, by income deflation through the “drain” effected by the taxation system). Inflationary pressures were thus kept at bay in the metropolis even while metropolitan capitalism got itself PoSTwAR DIRIgISME AND ITS CoNTRADICTIoNS 227 a market. The two requirements of capitalism, for finding markets and for imposing an income deflation in the outlying regions to ward off the threat of increasing supply price, were both achieved at one stroke.

But when state expenditure creates a market, it does not thereby release any raw materials in the way that the market obtained through the destruc - tion of colonial crafts had done. The two moments, of finding a market and of obtaining supplies of raw materials, which are subject to increasing supply price, are now no longer woven into each other. If state expendi - ture provides the market, then it is necessary in some other way to impose income deflation on the third world raw material users, so that increasing supply price does not come into play, threatening the value of money in the metropolis. But within the postwar dirigiste arrangement, there was no such “other way,” which left the system perennially vulnerable to inflation. This vulnerability was quite distinct from the vulnerability to inflation arising from the high level of employment, which Joan Robinson’s “infla - tionary barrier” had emphasized and which actually went back to Marx’s proposition that the existence of a certain reserve army of labor was an essential condition for the viability of capitalism. Marx’s proposition has been usually interpreted to mean that if the reserve army fell below a certain relative size vis- à-vis the active army, then the trade unions would become strong enough to demand and obtain real wages relative to labor productivity, which would squeeze the rate of profit to levels that would threaten the survival of the system. (This is not the only reason for the existence of a reserve army according to Marx; the imposition of work-discipline, which capitalism achieves through coer - cion upon the workers, becomes impossible in the absence of a reserve army into whose ranks the workers from the active army can be pushed as punishment for “indiscipline.”) Marx’s argument actually related proximately to money-wage move- ments, but, since in his schema money-wage and real wage movements always went together, as he was talking about a commodity money system, the argument can be interpreted as referring to either. If we talk, however, of a paper money or credit money system, then a fall in the relative size of the reserve army of labor would raise money wages, exactly as Marx had argued, though instead of increasing real wages, higher money wages 228 CAPITAL AND IMPERIALISM would get “passed on” in the form of higher prices. Marx’s proposition about the system depending upon the existence of a minimum relative size of the reserve army of labor therefore has a wider validity beyond the com - modity-money world that he was specifically talking about, which Joan Robinson’s 1956 concept of an “inflationary barrier” brought out later. 2 But even if a reserve army of adequate size is maintained and there is stability in money wages, as the economy grows it would require larger and larger amounts of raw materials, a part of which has to come from the tropical landmass. Since the supply price of this part is increasing, it would jeopardize the value of money in the metropolis either directly or indirectly, via jeopardizing the value of money in the periphery, which would then control its exports to the metropolis. Even with given money wages all around, therefore, there would be a threat to the value of money.

Because of this, the imposition of income deflation on input producers and input users in the periphery becomes necessary, even if the state through its expenditure provides adequate markets for the capitalist prod - ucts in the metropolis. The postwar dirigiste arrangement did not have any mechanism for imposing such income deflation.

The Consequences of the Absence of Drain Deindustrialization had not been the only mechanism for income deflation in the periphery. The drain of surplus was also an important mechanism for achieving the same end, so that the value of money in the metropolis did not get undermined by the phenomenon of increasing supply price.

Political decolonization, which brought the drain to an end, removed ipso facto a powerful instrument of income deflation. To be sure, other ways of surplus transfer from the periphery continued, such as through unequal exchange, 3 or through payment for intellectual property rights to metropolitan capital. However, the politically imposed transfers, such as through the colonial taxation system, came to an end, which regenerated the possibility of inflation and hence the threat to the value of money. There is yet an additional powerful implication of the elimination of the colonial drain. In the colonial period Britain, the leading capitalist coun- try, kept its own market open for the newly industrializing countries of PoSTwAR DIRIgISME AND ITS CoNTRADICTIoNS 229 that time. Had it not done so, the system of the gold standard would have been difficult to sustain because of the struggles for markets among the rival capitalist countries, and the world capitalist economy would have run into a crisis much earlier than it did. In fact, keeping its market open for encroachment by newly industrializing countries is an important hallmark of a world capitalist leader at all times.

Britain, however, managed to avoid getting into any balance of payments problems because of the drain from the colonies. Suppose it did not have access to the drain, then it would have got into debt with countries run - ning a current account surplus vis-à-vis itself. The drain, in other words, prevented an outpouring of IOUs by Britain. In the post–Second World War period, since political decolonization forecloses the possibility of a drain, the leading capitalist country of this time, the United States, which had to keep its markets open to others as part of its leadership role, has increasingly gone into debt. (This “open - ness” was being revoked under Donald Trump, an issue we discuss later.) In the absence of the drain, in other words, the world has had to hold on to a continuous outpouring of IOUs by the United States, making it, paradoxically, the most indebted country in the world. The most powerful capitalist country in the world being the most highly indebted represents an unprecedented situation in the history of world capitalism. But this only reflects another unprecedented situation, namely that we have for the first time the leading capitalist country not having access (to a degree that covers its current account deficit on the balance of payments) to a drain of surplus from an empire. This has two obvious implications. The first is the fragility it lends to the global financial system. This is an obvious and much discussed point and need not be labored any further. The second is that the IOUs of the leading country provide the base for an enormous growth of a financial superstructure. While this growth in the financial superstructure has been a remarkable fact in the postwar period, and some have even coined a new term, “finan - cialization,” to describe it, what is often not appreciated is that financial- ization owes not a little to the phenomenon of the absence of the drain of surplus from the periphery into the leading capitalist power. 230 CAPITAL AND IMPERIALISM To be sure, even if there had been a drain of surplus from the periphery, it still might not have sufficed to prevent a rise in the outpouring of IOUs from the leading capitalist power, so that some “financialization” might still have been inevitable. But financialization certainly would not have proceeded at the pace it has if the leading capitalist country had access \∆to a substantial drain of surplus from the periphery. Financialization, in short, is the other side of the coin to the absence of a substantial “drain of surplus” from the periphery to the metropolis as had occurred in the colonial period. With the outpouring of IOUs from the leading capitalist country to the rest of the world, the question arises: How is the value of the leading coun- try’s currency, not just vis-à-vis the currencies of other capitalist countries, but also with respect to the world of commodities, preserved? The Bretton Woods system sought to resolve this problem in a purely formal way by officially decreeing the U.S. dollar to be “as good as gold” and by fixing its price in terms of gold at $35 per ounce of gold. Such a system, however, could remain viable only if there was no rush to actually convert dollars into gold, but it obviously could not survive if there was such a rush. Since the printing of dollars was unrelated to the magnitude of gold that actually happened to be in the possession of the central bank of the leading capitalist country, gold convertibility of the dollar could clearly not be sustained, if ever it was seriously challenged. The presumption behind the Bretton Woods arrangement was that it would not be challenged because of an implicit understanding between the major capitalist countries, that is, the sheer power relationship between the advanced countries will keep the system going. But clearly if the outpouring of dollars reached massive proportions (an issue we will examine later), the system could not last. This is precisely what happened in the early 1970s, leading first to the suspension of dollar convertibility in 1971, and then the abandonment of the Bretton Woods arrangement altogether in 1973. To sum up, the basic weakness of the postwar dirigiste arrangement lay in that it sought to erect an international monetary system without the underpinning of colonialism, as the gold standard had. The absence of the colonial prop manifested itself in two ways: first, the absence of any mechanism for income deflation meant that inflation arising from increas - ing supply price and threatening the value of money could not be kept PoSTwAR DIRIgISME AND ITS CoNTRADICTIoNS 231 at bay; and second, the absence of colonial drain meant that the debt of the leading capitalist country piled up, causing a massive expansion in the financial superstructure and making the system particularly vulnerable and fragile. The collapse of the Bretton Woods system and with it of Keynesian demand management was the inevitable result, which only underscored that capitalism could not function without either a direct colonial prop or some arrangement that could produce a similar effect as a colonial prop. Putting it differently, two of the concessions that postwar capitalism had given, namely political decolonization on the one hand and Keynesian demand management on the other, were mutually contradictory. This would become clear only over time. During the time the contradiction did not erupt (for reasons we shall discuss later), the system functioned exceedingly well, to produce what has been called the “Golden Age of Capitalism.” But this “Golden Age” was essentially an aberration, some - thing that was intrinsically incapable of being sustained.

Contradictions of Third World Dirigisme Dirigiste regimes also came into existence in most third world coun- tries in the wake of decolonization. Though these regimes differed from one another in important ways, as we shall see, they all had one point in common, namely to use the state, including a public sector, against the domination by metropolitan capital that had been their legacy. Public sector enterprises were started to develop and process natural resources, to develop infrastructure, and to plug gaps in the production structure, especially with regard to basic and producer goods industries. Since the domestic capitalist class had been relatively weak and underdeveloped to start with, with little interest in undertaking any research and development, the public sector also became the means for developing whatever limited technological self-reliance that third world countries managed to achieve. Breaking out of the colonial pattern of international division of labor, through embarking on a process of industrialization, required protecting the home market from the entry of metropolitan products. The dirigiste regimes therefore set up tariff barriers and quantitative trade restrictions, behind which “import-substituting” industrialization could proceed. But 232 CAPITAL AND IMPERIALISM since the technology for such industrialization remained largely in the hands of metropolitan capital, collaboration with such capital became necessary for the domestic bourgeoisie, so that joint ventures involving domestic and foreign capital became the order of the day, and came up behind tariff walls. Thus, protectionism necessarily also meant protecting metropolitan capital that had jumped the protectionist walls to locate pro- duction units within the country through joint ventures.

Protectionism, however, only enabled domestic producers, whether in the public or in the private sector, to capture a larger chunk of the home market; it could not by itself give rise to larger growth over time. The dynamics of the system depended upon the rate at which the home market itself was expanding, especially since breaking into export markets for units that developed under the dirigiste regime behind protectionist walls was extremely difficult (unless metropolitan capital permitted it, which, except in the case of a few countries in East Asia in that period, close to the United States and supportive of its war against the Vietnamese, was scarcely on the cards). One very important factor affecting the growth of the home market was the rate of growth of agriculture. And while all over the third world the growth rate of agriculture picked up compared to the colonial period, there were major constraints upon this growth arising from the degree of land concentration. We must distinguish here between three distinct cases. The first is where the Communists had led the anti-colonial struggle; decolonization here was followed by radical land redistribution (followed in most cases by the formation of cooperatives and collectives). The second case is where the land had been substantially taken over by colonialists earlier, as in the case of the Japanese colonies; here, the U.S. occupation forces at the end of the war carried out land redistribution at the expense of the Japanese land - lords. The third case is where neither of the above two situations obtained; decolonization in these remaining cases was not followed by any radical land redistribution so that the rural power structure did not change suf- ficiently to encourage investment by smaller peasants. (Zimbabwe was one important exception to this, though it carried out land redistribution not immediately following decolonization but at a much later date.) PoSTwAR DIRIgISME AND ITS CoNTRADICTIoNS 233 The reason for this pusillanimity in carrying out land redistribution is what Lenin had noted in the case of Russia much earlier. 4 Where the bourgeoisie comes late to the historical scene, it is afraid that any attack on landed property may rebound into an attack on bourgeois property, and thus makes common cause with the landed interests in defending pri- vate property, even though this entails arresting the democratic revolution in the country. Therefore, the dirigiste regimes that came up in countries where the bourgeoisie, or proto-bourgeois elements, had played a lead - ing role in the anti-colonial struggle invariably eschewed any radical land redistribution. This is not to say that in this third group of countries, which constituted the majority of the countries of the third world, the nature of landowner - ship remained completely unchanged. Many feudal or semi-feudal land - lords, those who were not interested in turning to capitalist farming in the new situation, sold their land to rich tenants who now came to constitute a proto-capitalist kulak class. A tendency toward capitalist agriculture con - taining an admixture of landlord and peasant capitalism emerged in these countries. But, while the composition of the top landowning group thus underwent a change, the extent of land concentration did not diminish; a vast mass of pauperized peasants and agricultural laborers with little or no land continued to exist as before, despite decolonization. At the same time, agriculture was protected and promoted in various ways under the dirigiste regime by the new post-colonial state: through subsidized inputs; tariffs and quantitative trade restrictions; provision of cheap credit; provision of assured remunerative prices; public investment in irrigation and infrastructure; research and development under the aegis of the government for developing better seeds and better agricultural prac - tices; and public extension services for disseminating information about better practices. The main beneficiaries of these measures no doubt were the better-off peasants and landlords turning to capitalist farming; but compared to the colonial period, agricultural growth picked up. What was striking about the new third world dirigiste regime is that though it did not break land concentration and allowed the eviction of tenants for the resumption of land for capitalist farming by the earlier land - lords (which constitutes one kind of primitive accumulation of capital), 234 CAPITAL AND IMPERIALISM it did insulate agriculture from encroachment by domestic and foreign monopoly capitalists, and thereby prevented primitive accumulation of the other, classic kind.

Though the growth rate of agriculture picked up in these countries, it nonetheless limited the growth of the domestic market, especially because of the unequal distribution of income that accompanied such growth across the agriculture-dependent population. The constraint upon industrializa- tion arising from this source continued to plague the dirigiste regime. The other major source of the growth of the domestic market was the growth of state expenditure, which created greater employment opportu - nities in the traditional bureaucracy, in the “development bureaucracy,” and in the public sector, for large numbers of middle-class youth. Michal Kalecki had coined the term “intermediate regimes ” to describe this phe - nomenon. 5 He saw the urban middle class and the rich peasants who had a similar “intermediate” social position to this middle class in the coun - tryside as constituting the main social support–base for regimes that were characterized by a policy mix of state capitalism (public sector) and non- alignment (in foreign policy), and which obtained aid from both the Soviet Union and the advanced capitalist countries, using the former to drive a better bargain with the latter. What Kalecki’s analysis misses, even if we go along with his characterization, is the contradictions of these regimes. The basic contradiction of such regimes, notwithstanding their sub - stantial achievements , is that the growth in state expenditure, which is the main source of the dynamics of the system (given the inadequate stimulus from agricultural growth owing to the absence of land redistribu - tion), cannot be sustained because the state gets gradually engulfed in a fiscal crisis. This is because the competing claims upon the state budget from the bourgeois and proto-bourgeois elements, and from the emerging rural capitalists drawn from the ranks of both landlords and rich peasants, cannot be reconciled, except either through inflation at the expense of the workers, agricultural laborers, and middle-class employees, or through a curtailment of state spending, or, typically, a mixture of the two. 6 The dirigiste regimes that came up in the postwar years had much to their credit. They sustained rates of economic growth which were quite unprecedented, both in the advanced and in the underdeveloped PoSTwAR DIRIgISME AND ITS CoNTRADICTIoNS 235 countries, by their respective historical standards. But they represented essentially a passing phase, a transitional arrangement that could not be sustained for long. They represented an attempt to control capitalism, but “controlled capitalism” could not withstand the “spontaneity” of this mode of production. The Long Postwar Boom T he postwar economic regimes in advanced capitalist economies that involved state intervention in demand management over- came one particular problem that had arisen with the end of the prop of colonialism, namely the problem of deficiency of aggregate demand, of which the Great Depression had been a clear manifestation.

However, they did not contain any mechanisms for overcoming the other problem, namely the tendency toward inflation that could arise in the event of demand outrunning raw material availability, and also, more generally, because of increasing supply price. And, of course, demand stimulation by the state to raise employment also opened up the possibility that the reserve army of labor could dwindle to a point where inflation could arise from the side of the labor market, as Joan Robinson’s idea of an “inflation- ary barrier” had anticipated. If, despite these obvious hurdles that could stifle a state expenditure– stimulated boom, postwar capitalism nonetheless enjoyed a prolonged boom more pronounced than any boom ever experienced in its entire history over a comparable period of time, which has made many call this period the “Golden Age of Capitalism,” then the reasons for it need care - ful investigation. This is what we do in the present chapter. But first, let us look briefly at the nature of the boom itself. The facts about this boom are well known, though the interpretations differ; we will therefore focus more on interpretations, and, more generally, the theoretical perspectives. CHAPTER 15 ThE LoNg PoSTwAR booM 237 State Intervention in Demand Management State intervention in demand management through larger government expenditure took the form of military spending in the United States, which is why some have called this policy “military Keynesianism.” 1 The United States came out of the Great Depression essentially through larger military expenditure in the run-up to the Second World War. Germany and Japan, which had begun the militarization drive earlier, had overcome the Depression earlier as well, Japan being the first country to do so. The finance minister in the early 1930s, Takahashi, had been murdered for wanting a halt to further militarization once the “slack” associated with the Depression had been exhausted. The liberal capitalist countries, notably the United States, had followed suit only in the late 1930s. The United States continued with a large military budget even after the war for a number of reasons: first, because it was a convenient way of preventing a slide back into recession, which, in the new context of the socialist challenge, would also have been politically inexpedient; second, because military expenditure has the “advantage” that it does not entail encroaching upon the sphere of activity of private capital and hence does not arouse any opposition on that count; and third, because military expenditure neither increases the standard of living of the workers, which would strengthen their bargaining strength vis-à-vis the capitalists, gener - ating anger among the latter, nor adds to capacity as investment does. If it did add to capacity, then it would create problems of capacity utilization in the future, and require that the state, if it is to avoid such unutilized capac - ity and hence the onset of a recession, must keep increasing its investment expenditure and piling up capacity in a meaningless spiral, as the Russian economist Mikhail Tugan-Baranovsky had visualized. 2 But it was not just a question of keeping up the level of aggregate demand. The share of government expenditure increased as a proportion of GDP in the United States during the 1950s and 1960s. This increase, which was part and parcel of an increase in the share of economic surplus in the GDP, has been interpreted differently by different authors. Baran and Sweezy, following their own earlier separate works that had argued along similar lines, suggested that there was an ex ante tendency 238 CAPITAL AND IMPERIALISM for the share of surplus to increase, because the rate of growth of labor productivity tended to exceed the rate of growth of real wages, which meant that there was also an ex ante tendency toward overproduction, since wage-earners’ propensity to consume was higher than of those to whom the surplus accrued. Overproduction, however, was kept in check by growing government expenditure, especially military expenditure. 3 Nicholas Kaldor, reviewing Baran’s book, contested this claim of a ten - dency for the share of economic surplus to rise on the grounds that there was no sign of any secular increase in the share of post-tax profits in GDP. 4 If there had been an ex ante tendency for the surplus to increase, and its effect by way of generating overproduction had been kept at bay through state expenditure financed by a fiscal deficit , then we would have certainly seen the share of (post-tax) profits in GDP increasing over time. Since there was no sign of this, Kaldor would have had a point in claiming that Baran’s premise of a rise in the share of surplus was wrong, provided the overpro - duction-offsetting expenditure had been financed by a fiscal deficit. But from an observed ex post constancy in the share of (post-tax) profits in GDP, we cannot reject the claim of an increase in the ex ante share of surplus, as Kaldor does, for two obvious reasons. First, if growing govern - ment expenditure is financed by a tax on profits, then all three phenomena can simultaneously occur, namely a rise in the ex ante share of surplus, growing government expenditure (which means a rise in the observed ex post share of surplus), and a constancy in the ratio of post-tax profits in GDP. An observed constancy in the share of post-tax profits therefore does not constitute a refutation of Baran and Sweezy’s argument. Second, since surplus also includes the post-tax wages of “unproduc - tive workers,” apart from total post-tax profits and all tax revenues accru - ing to the state, an increase in such wages, associated for instance with a rise in the costs of circulation, could reflect a rise in the share of surplus (both ex ante and ex post), even if neither the share of government tax rev - enue nor the share of post-tax profits in GDP increase over time. Since Baran and Sweezy’s argument also focused on a rise in costs of circulation and on growing government expenditure relative to GDP financed not by a growing ratio of fiscal deficit but by growing taxes, including on capital- ists, they were clearly immune to Kaldor’s criticism for this reason as well. ThE LoNg PoSTwAR booM 239 Nonetheless, a question does remain over Baran and Sweezy’s argu- ment. Suppose there is no tendency for the share of surplus to rise ex ante but the government increases its expenditure relative to GDP by taxing workers, with the tax share on profits remaining unchanged and the dis - tribution of income between pretax wages and pretax profits remaining unchanged. In this case, there would have been no increase in the ex ante share of surplus, but only an increase in the ex post share of surplus. We cannot infer from an observed increase in the ex post share of surplus that there is also an increase in the ex ante share as well. The latter has to be independently and separately established. One may think that looking at the ratio of pretax profits to pretax wages in GDP would be an obvious way of establishing an ex ante tendency for the share of surplus in GDP to rise. Even this, however, is inadequate: at any given level of capacity utilization, if the government raises its expendi - ture and finances it by taxing profits, and if the capitalists squeeze wages in order to make up for the higher taxes they have to pay, then there would be a higher share of pretax profits (at the expense of pretax wages) in output, but it would not have been caused by any ex ante tendency for the share of surplus to rise as Baran and Sweezy had envisaged. Hence, the Baran- Sweezy argument requires a more careful marshalling of evidence than just looking at a few ratios. But no matter what view we have on the question of an increase in the ex ante share of surplus, there can be little doubt that capitalism in the period of postwar dirigisme saw an increase in the ex post share of surplus in output in the United States and in the capitalist world as a whole. In other words, whether the increase in the share of government expenditure in output and of the costs of circulation warded off a tendency toward overproduction that was immanent in an increase in the ex ante share of surplus, it did occur, so that the share of post-tax wages of the productive workers in total output declined over time. This assertion would appear to go against the “profit-squeeze” hypoth - esis that has been put forward by many, including Glyn and Sutcliffe in the context of British capitalism. Quite apart from the statistical issues that have been raised with regard to this hypothesis, namely whether to take depreciation and stock appreciation as part of profit, it should be 240 CAPITAL AND IMPERIALISM remembered that we are not discussing the share of wages compared to that of profits, but the share of wages compared to the surplus, much of which accrues to the state. 5 As Turner, Jackson, and Wilkinson argued in the context of British capitalism, taxation was a major instrument for squeezing wages; they had even talked of a “wage-tax spiral.” 6 Much of the welfare state expenditure undertaken in Europe was financed by taxes on the workers themselves, though obviously not all of that expense was so financed, for then it would have had little demand-stimulating effect, which it undoubtedly had. 7 Even if the tax revenue raised from the workers and the capitalists is in exactly the same ratio as the one in which pretax income is distributed among them, and the value of the balanced budget multiplier is unity, larger government expenditure raises the share of ex post surplus in total output. When there is unutilized capacity and unemployment in the econ - omy, it does so via output adjustment. And if the increase in government expenditure relative to base output persists even after “involuntary unem - ployment” has been overcome, then despite balancing its budget through taxes raised in this manner, the government would be unleashing a process of inflation in terms of the wage unit. In other words, even the process of overcoming involuntary unemploy - ment through government expenditure financed by equivalent taxation may entail an increase in the share of surplus in total output in the econ - omy. Whether larger government expenditure takes the form of military spending as in the United States, or of welfare state spending under the aegis of Social Democracy as in Europe, 8 as long as this enhanced expen - diture is met through taxing productive workers to a greater extent than before, it would still entail a rise in the ex post share of economic surplus in total output. 9 In other words, the postwar dirigiste regimes, while keep- ing the advanced capitalist economies close to full employment (but never at actual full employment, since a capitalist economy can never function without a reserve army of labor), effected, at the same time, an increase in the ex post share of economic surplus in GDP. This now raises an important question: If the unemployment rate is low and yet the share of surplus in output is increasing, then why did the work - ers not press for higher wages in order to fight against their declining share? ThE LoNg PoSTwAR booM 241 The Question of Working-Class Resistance Two answers can be given to this question. The first is that inflation below a certain threshold would go unnoticed by the workers, in the sense of not being anticipated and hence not entering into the money-wage bar - gain. 10 This is simply the “money illusion” argument of Keynes in a differ - ent guise. Some hypothesis of this sort also underlies the Phillips Curve, which states that workers never anticipate inflation. The first argument says that they do not anticipate inflation below a certain threshold, but it amounts to saying that as long as inflation remains below that threshold the Phillips Curve remains valid. And for a long period when the postwar dirigiste regime was in operation, the rate of inflation, though positive and eroding the share of post-tax wages, was not too high, which makes this hypothesis regarding why workers did not jack up money-wage demands to fight against a declining share of post-tax wages in output a plausible one. Workers fighting against a declining wage share would have meant accelerating inflation. The second answer is that the United States, to an extent, exported its inflation to other capitalist countries. Traditionally the United States had been a current account surplus economy, which was one reason why it prevented the Bretton Woods system from having any provision for making the surplus countries undertake measures to overcome their cur - rent account surpluses. But during the 1950s it set up a string of bases across the world to encircle the Soviet Union in the name of warding off its challenge to capitalism, a challenge that did not exist at all, since having lost 20 million people in the war, the Soviet Union was in no mood to spread socialism beyond what had been achieved by the end of the war, and was criticized on this score by Mao’s China. The cost of maintaining this string of bases meant that in the course of the 1950s the United States became a current account deficit econ - omy. Expenditure on these bases was met through the budget, and cor - responding to the fiscal deficit there developed a current account deficit.

The United States simply printed money to meet these deficits, and since under the Bretton Woods system the dollar was “as good as gold,” other countries were obliged to hold on to these dollars. 242 CAPITAL AND IMPERIALISM To be sure, behind the formal acceptance of the dollar to be “as good as gold” there was the real acceptance of the fact that the U.S. bases against the Soviet Union were meant to serve not just U.S. interests but the interests of the entire capitalist world. The other capitalist countries accepted the outpouring of dollars not because of a piece of paper signe\∆d at Bretton Woods declaring the dollar to be “as good as gold” but because the United States was the undisputed leader of the capitalist world. And they accepted for the same reason the outflow of dollars from the United States even when some of these printed dollars were being used for taking over European factories and other assets. There was some breast-beating in Europe over this, specifically over the unwisdom of lending to a country (which is what holding on to its cur - rency means) so that it can use the loans to buy up the assets of the lending country. But little could be done about it. As a result, the torrent of dol - lars from the United States continued, and these were held by European banks, which wanted to invest them abroad but were prevented from doing so because of the Bretton Woods system that allowed all sovereign countries the right to control capital flows into or out of their economies. In the absence of the ability of the United States to run these current deficits, it would have to squeeze domestic absorption via a higher rate of inflation compared to what actually occurred for maintaining its overseas bases. Its own rate of inflation, therefore, was moderated because of its abil - ity to run current deficits, which meant, in turn, that elsewhere the pres - sure of demand, and hence the rate of inflation, was higher than it would ceteris paribus have been otherwise. The United States thus exported to an extent its inflation to other countries. To summarize the picture that obtained during the so-called Golden Age, U.S. militarism kept up demand both within the country and else- where. It kept up demand elsewhere in two distinct ways: one was by virtue of the fact that a high level of demand within the United States props up other economies; the other was because the United States ran a current account deficit, which meant that other countries, forced to run a corresponding current account surplus, found their aggregate demand to be even higher than their domestic circumstances warranted. They too used government expenditure to boost their domestic economies, and in ThE LoNg PoSTwAR booM 243 Europe’s case through substantial welfare expenditure under the aegis of social democracy. But their domestic boost to aggregate demand was bol- stered by U.S. militarism.

Since this meant high levels of employment and capacity utilization, it called forth significant private investment and hence high rates of eco - nomic growth. As a direct consequence of economic growth, as the Kaldor- Verdoorn law suggests (that there is a positive relationship between eco- nomic growth and growth of labor productivity, with causation running from the former to the latter), and because several innovations that had not been introduced during the Depression could now be introduced in boom conditions, advanced capitalist economies witnessed high rates of labor productivity growth. And in a situation of low unemployment and hence strong bargaining power of trade unions, that meant high rates of real wage growth. With unemployment low and real wages growing rap- idly, the working class in the advanced capitalist countries witnessed an improvement in its living standards that was quite unparalleled in the his - tory of capitalism. Even so, the share of post-tax wages in total output was declining during this period, with a corresponding increase in the share of economic surplus. This would normally be expected to cause strong money-wage demands, leading to accelerating inflation, but inflation remained both low and non-accelerating, with no signs of any wage explosion until 1968 (on which more later), because the lowness of this inflation rate prevented its being taken into reckoning. Besides, it always takes time for workers to take stock of their cumulative losses. Put differently, the significant abso- lute improvement in the conditions of the workers prevented them from becoming agitated over their loss of shares in relative terms. This was a situation that was bound to come to an end sooner or later, as it actually did. But while it lasted, it kept the “Golden Age” going. But what about the other source of inflationary pressures, namely pri - mary commodity prices? Let us turn to this issue now.

Terms of Trade vis-à-vis Primary Commodities Many economists, notably W. Arthur Lewis, 11 had predicted after the 244 CAPITAL AND IMPERIALISM Second World War that there would be a rapid increase in raw mate - rial prices in the years to come. But far from this happening, raw mate - rial prices after the Korean War boom fell relative to manufactured goods prices, and that too when the overall rate of inflation was low. Between 1952 and 1971, there was a 23 percent drop in the prices of all primary commodities relative to manufactures; if we take non-oil primary com- modities the drop was 26 percent. Also remarkable is that almost the entire drop in the terms of trade of primary commodities vis-à-vis manufactures occurred prior to the notable acceleration in inflation that happened in the advanced capitalist coun - tries with the wage explosion of 1968, which one would expect to turn the terms of trade against primary commodities. Paradoxically, in the period 1967–72, there was hardly any movement in the terms of trade in either direction, but in the period 1951–67, there had been a secular movement in favor of manufactures while the fact of the protracted boom, together with the rapid growth of labor productivity in manufacturing, would have suggested the opposite, as economists like Lewis had also anticipated. The terms of trade movement is not difficult to explain. Economic surplus as a proportion of gross value added in the advanced countries increased during the 1950s and ’60s. Capitalists producing manufactured goods typically charge a price that is a mark up over the unit prime cost.

The state further imposes an indirect tax mark up on this price. The rise in the profit-cum-indirect tax margin, which raises the share of surplus in the gross value of output, is likely to entail a decline not only in the share of predirect-tax wages in gross value of output but also in the share of primary commodity producers. And despite this decline for primary producers the share of pretax wages in gross value added too can still go down, as indeed happened. 12 Hence, the adverse terms of trade movement for primary producers is also a part of the rise in the share of surplus. But the real question is, how did this happen while the rate of infla- tion remained relatively low? This is contrary to what would be expected since the phenomenon of increasing supply price in primary production, if nothing else, should have caused an acceleration of inflation owing to the persistence of the boom. Even over 1960–73, toward the latter part of which inflation had become quite pronounced, the average inflation rate ThE LoNg PoSTwAR booM 245 for twenty-one OECD countries was just 4 percent. In particular when income deflation through the mechanisms of the colonial period could no longer be imposed upon the third world, how is it that the phenomenon of increasing supply price did not make itself felt through a primary com - modity price explosion? Two reasons can be adduced for it. One, we have seen that the phe - nomenon of increasing supply price could be countered, in the case of commodities produced by the tropical landmass, through land-augment- ing measures, 13 of which irrigation is the most important (both for its own sake and also for making other land-augmenting measures such as high- yielding seed varieties effective). The colonial administration had under - taken very few land-augmenting measures in the third world. In fact, the Canal Colonies of Punjab were the only major irrigation project under- taken anywhere in the British Empire during the entire colonial period.

The post-colonial dirigiste regimes that arose in the third world, however, made it a point to undertake land-augmenting measures. Corresponding to the growing demand in the metropolis for the products of the tropi - cal landmass, there was also a growing supply through land-augmenting measures, which therefore kept the phenomenon of increasing supply price (which occurs only when there is little or no land-augmentation) in abeyance. Put differently, metropolitan capitalism imposes income deflation on the outlying regions for obtaining supplies of products of the tropical landmass at non-increasing prices relative to money wages not because such income deflation is inevitable in any sense, but because it is capi- talism’s way of obtaining supplies. Capitalism does not want an activist state intervening to raise production via land-augmentation, even within peripheral economies. Under British colonial rule, all government invest- ment had to fetch a minimum rate of return, and the colonial administra - tion always advanced the argument that there was no certainty that invest - ment in land-augmentation would fetch this rate of return. The reason for income deflation on the producers in the periphery, in other words, was not natural or geographical; it was social. And with the coming into being of post-colonial regimes, this social compulsion dis- appeared to a great extent. The post-colonial dirigiste regimes had no 246 CAPITAL AND IMPERIALISM compunctions about using fiscal resources, including fiscal deficits, to undertake irrigation investment, and more generally to undertaking land augmentation. Per capita agricultural output increased like never before, and this meant that inflation arising from this source was kept in check.

The second reason is that all over the third world the effort on the part of the new regimes was to industrialize, for which these countries required as much foreign exchange as they could possibly lay their hands on. Hence the pressure to sell products of the tropical landmass made many of these countries fight against one another to boost sales. The new producing countries, moreover, were at an advantage since they could ini- tiate price competition and snatch away markets from the existing large producers among such tropical countries who dominated the market but could not engage in price competition without being large-scale losers.

Hence, price competition to expand market shares became the order of the day, with new or small sellers taking the lead in cutting prices. Sri Lanka expanded its market shares in the tea market at the expense of India, while Bangladesh did the same in the case of jute textiles. And they did so through price competition. This increased competition among third world countries was also a factor keeping down the rate of inflation, despite the phenomenon of increasing supply price. The initiation of land augmentation within most third world countries, and the intense competition among them for push - ing out more and more primary product exports to obtain the foreign exchange required for industrialization, were the two factors that kept pri - mary commodity prices under control, even in the midst of such a large boom. This, however, could only provide a temporary palliative. The third world dirigiste regimes got embroiled in fiscal crises over time, since the emerging capitalist and landlord-capitalist strata used the budget as a means of primitive accumulation of capital that included rampant and growing tax evasion. The state therefore could continue the government investment-led growth process only through larger recourse to indi - rect taxation or deficit financing, both of which imposed an inflationary squeeze on the working people that was politically inexpedient within a framework of parliamentary democracy. Under the circumstances, it cut ThE LoNg PoSTwAR booM 247 back on the tempo of public investment, pushing dirigisme into a dead end and holding back on land augmentation.

The Golden Age conjuncture was necessarily a transient one. It could last only as long as the workers in the metropolis did not take note of the rising share of economic surplus in the GDP and did not jack up their money-wage claims to get back lost ground, and also as long as land aug - mentation could continue in the third world with the dirigiste regime not getting enmeshed in a fiscal crisis. Both of these denouements were bound to occur sooner or later, as indeed they did. But before that happened, capitalism enjoyed a Golden Age not because of itself but despite itself.

This was so because dirigisme , both in the metropolis and in the third world, though an essential factor underlying the boom, was anathema for capitalism. A Perspective on Imperialism Political decolonization was followed by economic decolonization against which the metropolitan countries fought bitterly, to the point of staging coups d’état against third world governments that dared to take control over their own national resources. The coups against Mossadegh in Iran and Arbenz in Guatemala were among the earliest such efforts, to be fol - lowed, prominently, by the coup against Allende in Chile. The fact of mili - tary interventions against third world governments in the course of this protracted fight has given the impression that imperialism was a powerful reality in the 1950s and ’60s, and apparently no longer is a reality. Precisely the opposite is correct. Once imperialism is seen as an arrangement for imposing income deflation on the third world population in order to get their primary commodities without running into the prob - lem of increasing supply price, it is clear that this arrangement had fallen through after political decolonization. The period of the 1950s and ’60s, far from being the heyday of imperialism in a new guise, represents rather a loosening of the imperialist knot, when imperialism could not impose its will on the third world. Imperialism’s aggressiveness in that period reflects its frustration at this inability. As we shall argue in a later chapter, metro - politan capital is in a much stronger position today to impose its will on 248 CAPITAL AND IMPERIALISM third world states and third world petty producers than in the Golden Age years. Indeed, in the sense of not having to resort to so many coups, imperialism appears “invisible.” The End of Postwar Dirigisme T he unraveling of the colonial arrangement, which preceded the various measures of political and economic decolonization, and which, in our view, was a major reason for the Great Depression, had meant that markets were no longer available “on tap” from this source for metropolitan capitalism. Political, and subsequently economic decolo - nization, meant two further things: first, the drain of resources that had characterized the colonial period and had acquired immense proportions during the Second World War and inflicted upon Bengal a famine that killed three million people was no longer available. This meant that com - modities were no longer available gratis to the leading capitalist power, so that playing the leadership role by running a current account deficit with other emerging powers got it deeper and deeper into debt. This is what happened to the postwar leader, the United States. Second, the income deflation that the drain and the process of dein- dustrialization had imposed on the colonies and semi-colonies of the thi\∆rd world to prevent the effects of increasing supply price from manifesting themselves in the form of a destabilization of the value of money could now no longer be imposed, which made the system additionally vulnerable. While state intervention in demand management, which Keynes had advocated and which became a reality after the Second World War, could overcome the problem of deficiency of demand that the unraveling of the colonial arrangement had thrown up, the other two problems mentioned CHAPTER 16 250 CAPITAL AND IMPERIALISM above could not be overcome. The postwar dirigiste regime in the met - ropolitan capitalist countries remained vulnerable on these two counts.

It also remained vulnerable to the possibility of a money-wage explosion, since the share of surplus in GDP was increasing in metropolitan coun- tries during the long boom, even as the unemployment rate came down greatly, to around 2 percent in Britain in the mid-1960s and around 4 per - cent officially in the United States in the Kennedy years, which greatly strengthened the bargaining position of the workers. These vulnerabilities did not become apparent immediately. They took time to manifest themselves, giving a false impression that they did not exist at all. But when they did appear, it spelled the end of the postwar boom, the so-called Golden Age of Capitalism, and of the dirigiste regime itself, which was no longer sustainable in the new situation. Let us look at how the different contradictions of the postwar regime played out.

Inflation and the Wage Explosion Throughout the 1950s and ’60s, the workers, especially the “produc- tive workers,” were losing ground because of the increase in the share of surplus (including costs of circulation) in GDP in the advanced capitalist countries. This was because, apart from the rise in the costs of circula- tion, there was a significant increase everywhere in the ratio of government expenditure to GDP. Whether this warded off an independently given ten- dency toward overproduction or was a sui generis phenomenon, an issue we touched upon earlier, need not enter the discussion here. But its obvi - ous manifestation was that prices rose more rapidly than unit labor costs (taking post direct-tax wages), that is, post–direct tax real wages rose less than labor productivity. This did not, however, disrupt the boom, and that is because the rate of inflation, itself being small, did not attract notice from the workers, espe - cially since (post–direct tax) real wages were rising rapidly anyway, even if less rapidly than labor productivity. Rapid labor productivity growth was stimulated both by high GDP growth and also by the use of the backlog of un-introduced innovations from the interwar period when the conditions of depression had thwarted their introduction. ThE END of PoSTwAR DIRIgISME 251 The rate of inflation began increasing in the mid-1960s. The reason was that the United States had become a current account deficit country from its earlier status of being a surplus country. The primary reason for this turnaround was the expenditure it incurred in maintaining military bases all over the world. This basically meant that other countries, taken together, were forced to run a current surplus with the United States, which meant, on the one hand, a boost to their aggregate demand coming from this external source, and, on the other, accumulating dollar reserves as payment for this current surplus. The running of a current account deficit by the United States provided a boost to the process of diffusion of capitalism to other countries, nota- bly in East Asia, which was exactly analogous to the way that Britain’s running of a persistent current deficit with capitalist rivals like Germany and the United States had done in the period before the First World War.

The only difference was that Britain’s deficit with rival powers was more than offset by its drain from the colonies. Britain, far from becoming exter - nally indebted, actually became the world’s largest creditor nation at that time, whereas in the case of the United States there was no such drain income, and its current account deficit entailed accumulating external debt (which was paid for under the Bretton Woods system by the export of U.S. dollars). Running a current account deficit for facilitating a diffusion of capi - talism and thereby satisfying the aspirations of the bourgeoisies in other emerging countries is a hallmark of the leader of the capitalist world. A deficit is the instrument through which the leader holds together the capi - talist world and keeps the system of its international payments arrange- ment intact, by accommodating its rival powers. The U.S. deficit played this role. With the heating up of the Vietnam War the U.S. fiscal deficit, and con - sequently its current account deficit, began to widen further, which cre - ated excess demand pressures, not just in the United States but in other capitalist countries as well, which had to run correspondingly wider cur - rent account surpluses. 1 This meant a boost to the rate of inflation glob- ally, that is, a further increase in the level of prices relative to post–direct tax wages in the advanced capitalist world. This increase proved to be the 252 CAPITAL AND IMPERIALISM proverbial last straw on the camel’s back; the rate of inflation exceeded the threshold rate above which it is incorporated into wage demands.

In consequence there was a worldwide money-wage explosion in 1968, which further pushed up the inflation rate. This was the first instance of the bursting forth of a contradiction that underlay the long boom but had until then remained dormant.

Sweezy and Magdoff, following a line of argumentation that goes back to Hyman Minsky and even earlier to Irving Fisher, argue that an increase in inflation is endemic to a situation of Keynesian demand management. 2 The aim of demand management is to prolong the boom and to prevent a crisis that would cause substantial unemployment. However, the longer the boom lasts, the fragility of the economy, including financial fragility, which Minsky emphasized, keeps increasing, and hence the depth of the crisis that would follow the collapse of the boom also keeps increasing.

Preventing a collapse of the boom therefore acquired greater and greater urgency over time, but it amounted, in effect, to continuing to support an increasingly fragile economy through state intervention. Such support, needless to say, must also take the form of preventing a drop in the inflation rate, for any such drop would push the economy toward a debt deflation of the sort that Irving Fisher had discussed, which would have serious recessionary consequences. So, the only direction in which the inflation rate can move realistically, in a capitalist economy where state intervention is supposed to maintain a high level of employ - ment, is upward. (Steady inflation is at best an exceptional case.) Whether an increase in the inflation rate was inevitable in an economy where the state was committed to propping up the level of activity despite growing financial fragility, which Sweezy and Magdoff suggested, or whether it arose because growing military expenditure, which necessarily leads to war, and eventually did actually precipitate one (in Vietnam), required even greater growth in such expenditure, is an issue that need not detain us here.

On the basis of what we have suggested about a threshold level of infla - tion beyond which it becomes incorporated into the wage-bargain, even an erratic jump in inflation would push it beyond this threshold, precipitating accelerating inflation. The system, in short, was foredoomed to an inflation- ary crisis for any of these reasons. ThE END of PoSTwAR DIRIgISME 253 Put differently, the concept of an “inflationary barrier” advanced by Joan Robinson cannot be identified with some particular level of unem - ployment. (Likewise, the idea of a unique “non-accelerating inflation rate of unemployment” is a chimera.) A given level of unemployment at which inflation has not been accelerating may suddenly witness accelerating inflation if there is an increase in workers’ consciousness and militancy.

Indeed, whether inflation accelerates at a given rate of unemployment depends upon a host of factors, including the movements in the terms of trade, the past history of inflation, erratic jumps in aggregate demand, the learning process of the workers, and so on. The idea that a capitalist economy can be stabilized at a high rate of employment forever through state intervention in aggregate demand alone is false. This became apparent in the advanced capitalist economies in the course of the long boom. The postwar dirigiste regime in the metropolitan world did experience an increase in the rate of inflation in the latter half of the 1960s. This caused a money-wage explosion, both as a response to it, and also for making up the loss in the share of the workers over the preced- ing period, which in turn led to a further acceleration in inflation. This was serious enough, but it also made the system unviable for another reason, to which we now turn.

The Collapse of the Bretton Woods System The Bretton Woods system was based on a contradiction. The dollar was declared to be as “good as gold” and convertible into gold at $35 per ounce. Since the specificity of gold arises from the idea that it is never expected to, and never does, fall in value relative to the world of commodi - ties in a secular sense, which is what gives meaning to the term “as good as gold,” the dollar being declared as good as gold required that its value should not fall in a secular sense vis-à-vis the world of commodities. If it ever did, then the dollar would cease to be “as good as gold,” in which case it would be impossible to maintain its convertibility into gold. In other words, the Bretton Woods system required for its viability that there should be no secular inflation in commodity prices in terms of the dollar.

At the same time, it had no mechanism to ensure that there was no secular 254 CAPITAL AND IMPERIALISM inflation in commodity prices in terms of the dollar. The contradiction in the Bretton Woods system consisted in institutionalizing something that it had no means of realizing.

The worldwide wage explosion in 1968 was thus the first blow to the Bretton Woods system. The creditors of the United States, who were sitting on a mountain of dollars that had accumulated ever since dollars started pouring out of the country as it became a current deficit country, now insisted on converting dollars into gold, which was not tenable. The gold-dollar link that had been the lynchpin of Bretton Woods was aban - doned in 1971 and the system itself in 1973. There is a misconception about the events leading to the collapse of the Bretton Woods system. Since President de Gaulle of France had taken a lead in demanding gold in lieu of dollars, the crisis of the system has often been attributed to de Gaulle’s bloody-mindedness arising from the American takeover of European firms through dollars printed back home.

There was no doubt much angst in Europe at the time over the “American challenge,” and the Bretton Woods system that sanctified the dollar as being “as good as gold” was seen as an instrument of American hegemony.

But the contradiction of the system was deeper and had structural roots:

crucial elements of the colonial system that had worked to Britain’s advan - tage were not available to the United States. It lacked, to be more specific, any mechanism for keeping the inflation rate under control. And it is this lacuna that manifested itself in the late 1960s and early ’70s. It was not de Gaulle’s bloody-mindedness but the basic contradictions of the Bretton Woods system that led to its collapse.

Terms of Trade Movements The collapse of the Bretton Woods system in 1973 suddenly left the world capitalist economy without a stable medium of holding wealth. The dollar (and dollar-denominated assets) had played this role earlier, but with cur - rencies on a float and their respective values subject to great uncertainty, the world’s wealth-holders were suddenly left without any reliable medium for holding their wealth. There was a rush to holding commodities, which contributed to the sudden upsurge in primary commodity prices in 1973. ThE END of PoSTwAR DIRIgISME 255 No doubt an excess demand pressure was beginning to be felt, but the massive jump in the net barter terms of trade cannot be explained merely by “normal” excess demand without bringing in the panic shift to com - modities that followed the collapse of Bretton Woods. The net barter terms of trade between manufacturing and primary products that had moved against the primary commodities between 1950 and 1972 jumped by nearly 25 percent in their favor in 1973, and whether we include oil in primary commodities makes little difference to this move - ment. Soon enough, this rush to commodities subsided, even though there was a marginal increase, by about 9 percent, in the terms of trade of non-oil primary commodities between 1973 and 1974. In the case of oil, how - ever, the story was completely different. The formation of OPEC and the decision to jack up oil prices by enforcing output cuts among members shifted the terms of trade between primary commodities including oil and manufactured goods by about 104 percent in favor of the former between 1973 and 1974. The oil price hike was followed by a period of rapid inflation in the advanced countries. The inflation rate for the twenty-one OECD coun - tries as a whole was 8.5 percent for 1973–80, and 8.8 and 8.6 percent for 1980 and 1981, respectively, compared to a mere 4 percent for the entire period of 1960 to 1973. The inflation that continued in the late 1970s despite a reduction in the level of activity that occurred after 1973, which is often referred to as the “second slump” (the first being the slump of the 1930s), has been much discussed, with the term “stagflation” used to describe the phenom - enon. But there is nothing remarkable about it. The inflationary upsurge was sustained by its own momentum, with inflation causing money wage demands, which then fed into inflation, and so on. This inflation was finally brought under control only with a change in economic regime, with dirigisme and the commitment to high levels of employment becoming things of the past, and a new regime of “neoliberalism” being introduced in the advanced countries with the triumph of Thatcherism in Britain and of Reaganomics in the United States. There is a difference between the 1973–75 slump and what followed in the Reagan-Thatcher period. The 1973–75 slump occurred when the 256 CAPITAL AND IMPERIALISM massive oil shock resulted in a shift in global income distribution from the bulk of the population in the advanced capitalist countries that were oil consumers to the OPEC countries, which held much of their enhanced incomes in the form of bank deposits with metropolitan banks. The “mar - ginal propensity to consume” (to use a Keynesian term) by those from whom income distribution shifted was higher than the marginal propen - sity to consume of those in whose favor income distribution shifted. The oil price hike in short had a demand-depressing effect on the global economy .

To offset this effect what was needed was an increase in state expendi - tures at the global level. But since there was no coordination among capi- talist states in this regard at the global level, since each state was making its own decision about how to cope with the oil shock and the resulting inflation, each took the decision to restrain or contract state expenditure in the wake of this shock. Individual capitalist states, instead of taking needed counter-recessionary measures, took measures on the contrary that either did nothing to offset the recession or actually compounded it. The 1973–75 crisis can thus be seen as the consequence of the kneejer\∆k reaction of the dirigiste regime to the upsurge of inflation. The paradigm still remained the Phillips Curve, only with the proviso that it had “shifted”; that is, the presumption was that after a certain time things would “settle down,” and there would once again be a revival of state intervention in demand management to achieve high levels of employment, perhaps not so high as had been experienced during the Golden Age, but sufficiently high nonetheless. Some even thought of a “prices and incomes policy” with which coun- tries could recapture the low levels of unemployment they had experi- enced during the “Golden Age” years. Such policies were tried for a while but without success. It was clear that a going back to the days of the post - war dirigiste regimes was no longer possible. An altogether new regime then began to emerge. But capitalism is not a planned system; so the new regime did not emerge in a planned manner. It emerged as a consequence of the balance of class forces then existing. In particular, finance capital, which had been forced to make concessions after the war and had to willy-nilly accept the Keynesian demand management it had opposed in the prewar period, ThE END of PoSTwAR DIRIgISME 257 now asserted its will, both because Keynesianism was discredited by the inflation and also because finance capital had become greatly strength- ened during the Golden Age years. It had become “international,” pre- cisely what Keynes had not wanted it to be, anticipating rightly that such internationalization would undermine the autonomy of the nation-state to pursue demand management policies, though he did entertain the hope that the opposition of finance to state intervention in demand management would disappear when the correct theory was presented to it, since he attributed such opposition to a basic misconception. International finance capital backed the Reagan-Thatcher agenda, and the outcome was the end of the dirigiste regimes. Let us turn now to a discussion of the process of “internationalization” or “globalization” of finance.

The Process of Globalization of Finance The end of the colonial arrangement meant that the leading capitalist country, which in an earlier epoch had offset its current deficit with rival powers through a drain from the colonies, now had to increase its debt. In the case of the new leader, the United States, debt took the form of export- ing dollars. And as the U.S. current balance, which was positive to start with (otherwise the United States could not have become the world capi - talist leader) became negative, the deficit started widening, with the ratio of dollar deposits in metropolitan banks (toward which the exported dol - lars gravitated) to the GDP in the metropolis increasing. And with it, there was increased pressure to open the entire world to unrestricted financial flows in search of profitable investment opportunities, which the Bretton Woods system had allowed countries to put up barriers against. This pressure in a sense had to succeed. Since under Bretton Woods the surplus countries had been under no obligation to undertake any adjustments, which had to be carried out exclusively by the current-deficit countries, the latter, before undertaking the journey of deflation-cum-cur - rency devaluation, were keen to have at least some short-term financing to give them some breathing space. The increased liquidity in the interna - tional financial markets caused by the large-scale dollar outflows from the United States, which had been the progenitor of the Eurodollar market, 258 CAPITAL AND IMPERIALISM made it possible for the deficit countries to arrange short-term funding through “hot money” flows to meet immediate balance of payments dif - ficulties. Britain, which was in balance of payments difficulties toward the end of the 1960s, was a major recipient of such flows. The process of globalization of finance can be said to have begun with such flows. Once the flows started, governments had to be careful not to upset the “confidence of the investors,” a euphemism for speculators’ confi- dence, for then the balance of payments could suddenly plunge into a crisis.

And since such “confidence” required keeping the economy open to finan - cial flows, economies increasingly became open to such flows, moving away from the capital controls that the Bretton Woods system had allowed them to institute. This happened in Europe toward the end of the’60s, in Africa and Latin America, where IMF “conditionalities” were used for such “opening up,” in the ’80s, and in India in the ’90s. Whether the currency acquired full convertibility, which in many of these third world countries it did not, the economy got caught in the vortex of globalized financial flows. When the oil shocks happened in 1973 and 1980, there was a further swelling of dollar deposits with the metropolitan banks, and several coun- tries, especially in the third world, got saddled with balance of payments problems. The metropolitan banks were involved in the recycling of pet - rodollars, but they needed an agency to act as a monitor for them and the IMF took on this role. It not only acted as a conduit for such recycling through its own “Oil Facility” and “Extended Facility” loans, but it also facilitated borrowing by third world countries once they had accepted the “discipline” of IMF “conditionalities.” All this meant a change in the role of the IMF, from merely being an occasional lender to countries undergo- ing balance of payments stress and advising them to undertake “stabili - zation,” to becoming an instrument of international finance capital to get countries to undertake “structural adjustment,” which would open them up to unrestricted global flows in goods, services, and capital, including above all finance. It was ironic that an institution with whose founding John Maynard Keynes had been associated in his capacity as a founder of the Bretton Woods system, who had wanted to “let finance be national,” now became an instrument for opening up economies to “reforms” so that finance ceased to be national. ThE END of PoSTwAR DIRIgISME 259 Opening economies to global financial flows entailed a change in the relative weights of the nation-state and the-now globalized finance capital.

To prevent finance from flowing out en masse , the state had to be careful not to upset the “confidence of the investors,” which meant kowtowing to the demands of finance. Finance, in turn, which had had to yield ground in the immediate postwar years because of the socialist threat and working- class restiveness in the advanced countries, was now in a position to estab- lish its supreme hegemony, of which the adoption of neoliberal policies was an obvious manifestation. This hegemony, and the associated neoliberal policies did not suddenly appear fully formed on one fine day. The crisis of the dirigiste regime caused by inflation, against which it had no bulwark in the post-colonial era, was exploited by international or globalized finance capital, which was in the process of being formed within the Bretton Woods system to launch an attack against this regime and replace it with the neoliberal regime, whose characteristics and implications we will examine in the next chapter. But before proceeding further we must distinguish between the account of the transition from dirigisme to neoliberalism that we have given above and accounts given by others. In particular, we shall take up certain comments by Paul Krugman for underscoring the sui generis nature of our analysis.

The Pitfalls of a Ricardian Reading of the Transition Paul Krugman, of course, is not concerned with the transition between regimes. His concern is with the phenomenon of inflation, why it occurred in the late ’60s and early ’70s, and why it subsided subsequently, and he has provided a Ricardian interpretation. 3 While we have emphasized the vulnerability of metropolitan capitalism because the colonial prop was no longer available to it, and while its market-providing role was taken over by the state that now carried out “demand management,” its inflation- restraining role could no longer be fulfilled, so that it was only a matter of time before the system would run aground, Krugman takes an altogether different track, which is essentially Ricardian in nature. The inflation in the early ’70s, he argues, was because of a resource crisis, that is, excess demand pressures with regard to resource availability. 260 CAPITAL AND IMPERIALISM The crisis was overcome, according to him, through supply adjustments such as oil strikes in the North Sea and the Gulf of Mexico, and the entry of new land into cultivation. This is essentially a Ricardian explanation (though without bringing in the question of “diminishing returns” and secular shifts in terms of trade).

The inadequacy of this explanation is evident from the fact that the crisis of resource shortage of the 1970s was not universally overcome through supply adjustment. In the case of the most vital primary commodity for instance, food grains, it was overcome through a severe compression of demand, and this was achieved through the imposition of an income defla - tion upon large masses of the population of the world. Globalization of finance, which was responsible for ushering in the neoliberal regime, played the role of imposing this income deflation. An income deflation, it is often not recognized, has an effect analogous to that of what Keynes had called a profit inflation in eliminating excess demand. While profit inflation does so by raising prices relative to money incomes, an income deflation does so by squeezing money incomes rela - tive to prices. Hence “inflation control” can always be achieved through an income deflation that brings about the same effect as profit inflation would have done, but in a different way. But whereas the two have the same consequence by way of eliminating excess demand, an income deflation is preferred by finance capital since it does not cause a fall in the real value of financial assets. The hegemony of finance in the world economy there - fore meant a switch to income deflation, which was imposed through the neoliberal regime that the world moved into with the collapse of dirigisme .

The methods of income deflation, especially in the third world, were obvious: cuts in subsidies; cuts in transfer payments to the poor; cuts in government expenditure that reduced both welfare spending and employ - ment; privatization of essential services, which, though it raises the effec - tive price paid by the poor, is not captured by typical price indices; the reduction in private demand for other goods owing to the privatization of essential services; and so on. In short, the entire gamut of measures that constitute neoliberal policies have this one overwhelming characteristic, of squeezing the demand for goods on the part of the working people from the income side rather than from the price side. And it is this squeeze ThE END of PoSTwAR DIRIgISME 261 rather than any supply adjustment that ended the 1970s inflation in pri - mary commodity prices. Because of this income deflation, the supply side also suffers. In other words, income deflation, while squeezing the demand side, also squeezes the supply side, since the victims of such deflation include the peasants and petty producers as well. But the squeeze on the demand side is greater than any squeeze on the supply side, which, after all, is how it overcomes the problem of excess demand. According to the Food and Agricultural Organization (FAO), the aver - age annual world cereal output during the triennium 1979–81 was 1,573 million tons for a population (for the midyear of the triennium) of 4,435 million. For the triennium 1999–2001, the cereal output had increased to 2,084 million tons for a world population (again for the midyear 2000) of 6,071 million. This represents a decline in per capita cereal output of the world, from 355 kilograms in 1980 to 343 kilograms in 2000. In other words, far from there being a supply adjustment, there was actually a decline in the per capita cereal output of the world. Since the income elasticity of demand for cereals is certainly positive if we take both direct and indirect demand for cereals (the latter through processed foods and through feed for animals whose products are then consumed), that is, if we take the final demand for cereals as well as the input demand in the Leontief (input-output) sense, there should have been an excess demand for cereals causing a rise in their prices relative to the vector of money wages and money incomes. This should also have caused a shift in the terms of trade between cere - als and manufactured goods in favor of the former, since manufactured goods prices are typically fixed on a prime cost-plus basis, and the rate of growth of labor productivity was much higher in manufacturing than in cereal production. Ironically, we find a decline in the terms of trade for cereals vis-à-vis manufacturing in the world economy that was as high as 45 percent over these two decades. 4 In other words, excess demand pres - sures that would have arisen in the cereal markets were nullified without causing any profit inflation through the imposition of an income deflation, which was so sharp that the terms of trade actually moved in a direction opposite to what one would have expected. 262 CAPITAL AND IMPERIALISM An Echo of Colonialism The colonial regime, as we have seen, imposed income deflation upon the working people of the colonies and semi-colonies of the third world. The income deflation that neoliberalism has imposed is a replication of this colonial phenomenon. The mechanisms through which income deflation is imposed in the two periods are obviously different: in the colonial period the mechanism was a mix of drain and deindustrialization. In the neolib - eral era the mechanism is through public expenditure cuts, some degree of deindustrialization in the sense of traditional activities being replaced by those under the aegis of multinational corporations, such as Walmart replacing a host of retail traders, and also a winding up of the institutional support system by the state that had been developed for peasant agricul - ture and other petty producers like handloom weavers, which lowers their incomes. At any rate, colonial-style drain of surplus is no longer possible, though some transfers from the third world to the metropolitan countries continue. But income deflation is imposed nonetheless. We shall look at the implications of the neoliberal regime in detail in the next chapter. But two points about it need to be noted here. First, the diri - giste period had seen an attempt to build an alternative structure, under the influence of Keynesian ideas, which was an alternative to the colonial structure, with state intervention boosting aggregate demand. This, how - ever, suffered from a major lacuna: there was nothing to replace the infla - tion-controlling role of the colonial regime, which is why inflation flared up in the early 1970s. Neoliberalism entails a partial rectification of this, by instituting income deflation, as in the colonial times, but in a new form, so that a mechanism for inflation control of the sort that had existed earlier is re-created. Neoliberalism, in short, represents a reassertion of imperialism. But precisely because this reassertion occurs without any necessary armed intervention, through the “peaceful” operation of the market, it is not recognized as such. We have seen that many who recognize imperial - ism as a phenomenon during the dirigiste period because of the several instances of armed intervention against third world governments attempt - ing economic decolonization, do not do so in the current period when such instances of armed intervention have become comparatively more ThE END of PoSTwAR DIRIgISME 263 scarce (except in specific regions). 5 This is an error. The earlier interven- tions occurred because imperialism was being challenged and was gen - erally in retreat. The absence of such interventions today testifies to the triumph of imperialism: income deflation can be imposed on third world populations through governments compelled to do so by the logic of being caught in the web of neoliberalism. Second, because neoliberalism represents the hegemony of interna - tional finance capital, which frowns upon state intervention in demand management, it has no mechanism for stimulating demand in the metro - politan capitalist economy. Colonial markets are now clearly inadequate, and the state is no longer allowed to stimulate demand directly. The only means through which demand can be stimulated in metropolitan capital - ism today is through the formation of asset price bubbles. To put it differently, the colonial arrangement constituted an ideal situa - tion for capitalism. The failure of Keynesianism, which fulfilled one role of colonialism but not the others, showed that capitalism could not function for any length of time in its absence. Neoliberalism fulfills the role of colo - nialism that Keynesianism could not, but in the process it fails to fulfill the role that Keynesianism had done. Neoliberalism tries to re-create some features of colonialism, namely income deflation on the working people of the third world, with a view to stabilizing capitalism, and does succeed in this regard. In the process, it exposes capitalism to another kind of structural crisis arising from the side of demand, which we will soon examine.