Capital and Imperialism: Theory, History, and the Present Read online

  In this context land augmentation requires above all the intervention of the state. Irrigation, historically the main land-augmenting measure, cannot be done by individual peasant farmers unless water is supplied to entire villages through canals fed from the tropical river systems. The scale of the requisite investment for such canals is too large to be undertaken by individual peasants. Once canals are constructed, feeder channels to individual farms, or even wells whose water tables are nourished by these canals, can be constructed by the peasants. However, for constructing the canals or even reservoirs for storing water, and maintaining them, a supra-village, supra-peasant authority is needed.

  The state in earlier times had played this role, prompting Marx’s remark in the context of India that there have been in Asia since time immemorial three main departments of government: a department of Finance whose aim was plundering its own inhabitants, a department of War whose aim was plundering other countries, and a department of Public Works, since “artificial irrigation” was “the basis of Oriental agriculture.”3

  Likewise, even land-augmenting technical progress, which involves new practices, new varieties of seeds, and new methods of cultivation, requires research and experimentation beyond the capacity of an individual peasant cultivating a tiny strip of land in the densely populated tropical agricultural tracts. The spread of such new practices and methods to peasants on a large scale also requires extension services that only the state can provide. In short, land augmentation on the tropical landmass can occur only through state intervention and state expenditure. Though it might be thought that genetically modified plants, by raising yields, provide one way out of the difficulty through private expenditure, the results of such adoption of GM crops are highly disputed as they both increase seed dependence of farmers on transnational companies and also tend to increase output volatility.

  Under capitalism, however, state effort of this sort is precisely what is eschewed. There are at least three reasons for this: first, the entire ideological trappings within which the capitalist state, or its offshoot, the colonial state, is supposed to function, namely that it must balance its budget, that it can undertake any investment only if such investment earns a minimum rate of return, preclude any state effort toward land augmentation. Second, though the state makes allowances for projects that are of benefit to the capitalists, it follows these rigid rules when it comes to projects that would bring larger incomes to the peasants. The same Indian colonial state that used this rate of return criterion (a minimum rate of 5 percent had to be earned to make it worthwhile for the state to invest in a project) to avoid making any significant investment in irrigation in colonial India (with the sole exception of the “canal colonies” in Punjab), actually subsidized foreign companies to build the Indian railway system (which was essential to open up the economy to extraction by the metropolis of minerals, foodstuffs, and raw materials) by guaranteeing a 5 percent rate of return.

  The formal rules governing state action, in other words, rest upon the substantial reality of class relations, which brings us to the third point. Faced with two options, either to take a part of the products of the tropical landmass, through imposing taxes or other exactions on the peasants and other classes within this region, or to expand the output of such products through larger state expenditure on “land augmentation,” which would entail either state borrowing or reduction in state expenditure benefiting the capitalists, the preference under capitalism would be for the former.

  The upshot is that the means by which land augmentation could occur on the tropical landmass are foreclosed under capitalism because of the rules governing state expenditure within this system (which, in turn, have their basis in the material reality of class relations). Increasing supply price (or even a vertical supply curve) for tropical and semi-tropical products therefore is a reality capitalism has to deal with.

  Increasing Supply Price and the Value of Money

  David Ricardo’s argument was that increasing supply price, or what he called “diminishing returns,” would have two basic effects. First, it would give rise to a falling rate of profit as accumulation occurred. Since less and less fertile land would be used for cultivation as accumulation increased the demand for corn, say, on which the average productivity of labor would be less and less, and since the real wage rate was given in the sense that it could not fall below the long-run supply price of labor determined by a subsistence wage basket, the rate of profit would keep falling, until it fell to zero (when the wage rate equaled the average product of labor on the marginal land). This meant the onset of a “stationary state.”

  Second, there would be a shift in the terms of trade in favor of corn and against the manufacturing, or non-corn, sector (that is, the sector not subject to diminishing returns), which would mean that the rate of profit in the latter would keep falling, in tandem with that in the corn sector, until it fell to zero.

  But this idea of the rate of profit falling until it finally falls to zero is entirely unrealistic. If there are “diminishing returns” because of which certain products experience a rise in their relative price not only with respect to other, non-diminishing returns products, but also, in the Ricardian system, with respect to money, and if everybody knows that this is going to happen period after period, then the value of money would crash vis-à-vis such products long before any stationary state is reached. A money-using economy would become an impossibility, with everybody wishing to hold the diminishing returns products, in lieu of either the money commodity or any other commodity for that matter, long before the economy got to a stationary state. It is essential for the system, therefore, as we saw in chapter 1, that increasing supply price must not be allowed to manifest itself.

  Ricardo, of course, was writing in the context of a commodity money economy and assuming free competition, that is, equal wages and an equal rate of profit across sectors through free mobility of labor and capital. More pertinent for us is to look at a world with paper money and mark up pricing, where the effect of increasing supply price in destroying the value of money emerges even more clearly. We argued in chapter 4 that in such a world, with given production coefficients, the ex ante claims of capitalists and workers on output can be reconciled through an appropriate shift in the terms of trade against primary commodity producers. Such a shift is brought about through inflation. Since primary commodity producers are price-takers, the price they get is not indexed to the manufactured goods price; it gets adjusted only sluggishly, so that a higher rate of inflation entails worse terms of trade for primary commodity producers and hence a lower share in total output for them. In short, they have to be content with the “leavings” of the others.

  Increasing supply price means an increase in the labor coefficient per unit of output in the primary commodity sector. This will be absorbed by the system without any reduction in the share of workers or capitalists in the manufacturing sector, through a reduction in the real incomes of the primary producers via a higher rate of inflation, but without any shift in the terms of trade. Since the trigger for higher inflation is not increased claims by the workers or capitalists but a rise in the labor coefficient in the primary producing sector, this rise will be exactly offset by reduced income per unit if labor, which will raise the rate of inflation but leave the terms of trade unchanged.

  While a once-for-all increase in labor coefficient in primary commodity production will entail a higher, but not accelerating, rate of inflation, if the labor coefficient keeps rising, which is what increasing supply price means, then the rate of inflation will accelerate.4 This destroys the value of money.

  People switch from holding money as a form of wealth to holding commodities as a form of wealth. Of course, such a shift may happen even when there is steady inflation, provided it exceeds a certain threshold rate. But with accelerating inflation occurring, and then becoming expected, because of a rising labor coefficient in primary commodity production, a shift from holding money to holding c
ommodities is bound to happen.

  If we denote the inflation rate by r, then an anticipation of accelerating inflation implies that Suppose last year’s price (for period t–1) is 100; then if the current year’s price is 105, that is, the current rate of inflation is 5 percent, then next year’s expected inflation rate must be more than 5 percent, meaning that next year’s expected price must be more than 110.25. Similarly, if the current year’s price is 110, that is, the current inflation rate is 10 percent, then the next year’s price must be more than 121. Thus, a 4.8 percent increase in the current price, from 105 to 110, causes a rise in the expected price by at least 9.8 percent, from 110.25 to 121. The elasticity of price expectation thus exceeds unity, and with an elasticity of price expectation greater than unity, there cannot be any stability in the value of money vis-à-vis commodities.

  This, incidentally, answers the question that may be raised by many, namely since money has no carrying cost while commodities have a carrying cost, how can money be supplanted by commodities unless inflation exceeds some threshold level? This argument becomes irrelevant when accelerating inflation is expected. No matter what the current level of inflation, even if it is below the carrying cost, if accelerating inflation is anticipated, then there can still be no equilibrium, and the value of money would still plummet to zero.

  The reason for this is that all commodities do not have identical carrying costs, and all persons do not have identical price expectations. As long as there is even one person who expects the next period’s price of a certain commodity to exceed the current period’s price by a margin larger than the carrying cost of the commodity in question, then that person would move to the commodity from money (for simplicity we are ignoring the risk premium here). This would raise the price of the commodity further, which because of elastic price expectations would make more people shift to this commodity, which would raise its price further, and so on. Likewise, what is happening to this commodity would also affect the price expectations for other commodities, with the result that even if the initial rate of inflation was lower than the carrying cost, the economy still could not possibly reach an equilibrium. It follows that anticipation of accelerating inflation, which increasing supply price would engender, would simply destroy the value of money. It is incompatible with the continuance of a money-using economy.

  It becomes essential for capitalism, therefore, quite independently of the Ricardian falling rate of profit, to ensure that the shadow of increasing supply price does not fall on the economy.5

  Negating the Threat of Increasing Supply Price

  One obvious way that increasing supply price can be warded off is through a depreciation of the exchange rate of the tropical region’s currency vis-à-vis the metropolitan currency. A simple example will make the point clear. Let us assume that we are talking about a vertical supply curve, that is, the tropical land-mass is fully used up and the output of its products cannot be increased at all. With accumulation, as the demand for these products rises in the metropolis, domestic absorption of them within the tropical region must be curtailed to make more supplies available for the metropolis. An obvious way for this to happen, which has happened in history, is through what Keynes had called “profit inflation.”

  With the rise in demand, since supply remains unchanged, there is a rise in price relative to money wages. The profit margin widens, hence the term “profit inflation,” forcing reduced consumption by the workers, whose money wages are not indexed to prices, and thus larger releases of the good in question for use in the metropolis. Of course, it is not just the workers, or peasants in this case, who have sold their products at precontracted prices but who have to buy the same or substitute products at higher prices, whose consumption is squeezed. All consumers of the product who have fixed money incomes, or money incomes that do not go up pari passu when the price of the product increases, have to curtail their consumption with the rise in the price, releasing more of the product for the metropolitan market. Profit inflation therefore acts to release supply for the metropolitan market in response to growing demand, even when the output of the product cannot go up.

  But profit inflation in the tropical region will not pose a threat to the value of money in the metropolis if there is a corresponding depreciation of the exchange rate of the region vis-à-vis the metropolis. In a world where capital is free to move across frontiers, this will happen spontaneously. With inflation in the tropical region, there will be an expectation on the part of the wealth-holders of a corresponding decline in its nominal exchange rate. They would then shift from the tropical currency to the metropolitan currency, precipitating a depreciation of the tropical currency that would be of the same order as the inflation (if the original real effective exchange rate of the tropical currency was an equilibrium one and perceived to be so).

  With regard to the tropical and semi-tropical products, produced, with the exception of a few plantation crops, by peasant agriculture, which capitalism requires and which are subject to increasing supply price because of the fixed size of the tropical land, it is essential that there be a regime binding the tropical region with the metropolis, which satisfies two characteristics. First, this region must be “opened up” for trade with the metropolis so that there are no restrictions on the flow of goods from it to meet metropolitan demands. And second, it must also be open to capital flows into and out of its borders, so that exchange rate changes occur that insulate the metropolitan currency from the effects of inflation in the periphery.

  But even having such a regime would not be enough for two reasons, one of which is quite straightforward, but the other less so. The straightforward reason is that if the tropical product being released from domestic absorption is for use in the metropolis, it suggests that the metropolis requires only those products that were already being produced in this region, even before it was opened up for trade. This, however, is not necessarily the case. The metropolis also requires, apart from the goods the tropical region already produced, a whole range of other goods, which, though producible only on the tropical landmass, were not being produced on it earlier. The peasants in the tropical region have to be made to produce these goods, diverting area from the goods they were already producing toward these new goods.

  Of course, once the production of these goods has been introduced, then relative price changes might perhaps be enough to make peasants produce more of such goods in response to a larger demand from the metropolis (though this would not negate the necessity for profit inflation). But to introduce them at all requires some mechanism. In colonial India, this mechanism was a system of advances by traders (themselves linked to exporting agencies). These advances had to be taken by the peasants in order to pay in time their land revenue to the colonial administration or land rent to their local landlords—the zamindars who, in turn, were required to pay the bulk of rent as revenue to the colonial administration. If these payments were not made in time, then the peasants would forfeit whatever rights they had to the land, which is why they were forced to depend on the traders’ advances. The traders then specified what crops they would grow and the price at which these crops should be made available to them. The market signals, in short, were relayed to the peasantry through the traders who gave them advances. The regime imposed on the tropical region thus included not just openness to trade and openness to capital flows but an arrangement for dictating the production pattern.

  But even this was not enough for a deeper reason, namely that relying on profit inflation with offsetting exchange rate depreciation was itself not enough to get supplies of tropical goods for the metropolitan market out of a given landmass, We discuss this in the next section.

  The Need for Income Deflation

  There are two obvious reasons why the mechanism of profit inflation alone would not be enough for extracting tropical products for metropolitan requirements. The first is that even though the metropolis might be made free of any accelerating inflation caused by increasi
ng supply price because of the exchange rate depreciation accompanying such inflation in the periphery, the periphery itself would now get characterized by accelerating inflation for exactly the same reason. The currency of the periphery would not just depreciate vis-à-vis the metropolis, but it would collapse as people move to commodities or the currency of the metropolis.

  Now, just because a collapse happens in the periphery, capitalism cannot be indifferent to it. What capital requires is an arrangement, and not sheer chaos. Hence, the profit inflation route for extracting larger amounts of supplies from the fixed output of the tropical landmass cannot be followed to a point where accelerating inflation becomes a threat even in the periphery. There has to be an additional route for extracting supplies, apart from profit inflation. Profit inflation can play this role only to a limited extent—other than in exceptional periods such as wartime when the freedom of asset choice is restricted and chaotic developments and massive loss of lives are occurring anyway.

  A second factor adds to this. We have so far assumed that the chaos unleashed by profit inflation in the periphery does not spread to the metropolis, and that the metropolis is only concerned about this chaos because it wants to keep an arrangement going and not see a collapse of the periphery’s currency. But the currency of the metropolis also is threatened by any tendency toward a collapse of the periphery’s currency. This is because if such a collapse makes wealth-holders in the periphery move, say, to holding gold instead of the periphery’s currency, then, given that gold supplies are non-augmentable in the short run, the gold price will go up even in terms of the currency of the metropolis. This would induce some wealth-holders to shift from holding the currency of the metropolis to holding gold, which has a low carrying cost. In such a case, the threat of collapse of currency value would no longer remain confined to the periphery alone but would also spread to the metropolis.