The Liberal Defence of Capitalism

Prabhat Patnaik

THE liberal defence of capitalism takes two distinct forms in economic theory.
One states that the capitalist system operates in a manner that ensures full
employment of all resources and produces the bundle of goods it does with
“efficiency”, which is defined as a state where no more of any good within this
bundle can be produced without having to produce less of some other good. This
claim of full employment is so palpably false, as the entire history of
capitalism, marked by the systematic coexistence of unemployed labour and idle
equipment, shows, that liberal economists who are more honest invoke a second
strand of argumentation.

This second strand, while admitting that capitalism does not actually operate in
the manner described by the first strand, and that on the contrary it is
characterised systematically by the coexistence of unemployed workers and idle
equipment, claims, however, that its operation can be rectified through State
intervention to make this lacuna disappear. It sees the State as an external
entity, standing outside of the system and intervening in its “spontaneous”
operation to rid it of its ill-effects.

The Keynesian tradition obviously belongs to this second strand. It shares with
Marxism the perception that the system left to itself is indeed beset with
crises, and is incompatible with the demands of a humane society; but it differs
from Marxism in its belief that the State, even in a capitalist society, can
intervene effectively to rid the system of its basic ills. As Keynes had put it,
there was no need for the social ownership of the means of production as the
socialists wanted; “socialisation of investment”, by which he meant the use of a
set of “central controls” to ensure that the level of investment was
sufficiently high to prevent any dearth of aggregate demand at full employment
output, was all that was necessary to overcome the basic lacuna of the
capitalist system.

I shall not discuss here the Marxist criticism of this position. I shall instead
look at the logic of this second strand on its own terms and at how far it
conforms to the reality of contemporary capitalism. One obvious question that
arises is: how can the State intervene to achieve full employment if the
capitalists oppose such intervention? The answer to this question that Keynes
had given was that the capitalists would not oppose such intervention since they
would also stand to benefit from it, ie, that State intervention to boost
aggregate demand was a “non-zero-sum game”, in the sense that everybody could be
made better off through such intervention: the workers through larger employment
and the capitalists through larger profits that would arise from better
utilisation of the productive capacity at their command. And even if the
proponents of this second strand concede that “full employment” in the true
sense of the term would be opposed by capitalists, because of the fear that any
disappearance of the reserve army of labour would mean that the workers would
“get out of hand”, they would still hold that State intervention can push the
level of employment much higher than where it would otherwise be on average in
capitalist economies operating “spontaneously”.

But then the question may be raised: if State intervention to maintain high
levels of activity is a “non-zero-sum-game”, ie, works to the capitalists’
benefit too, then why has it not been tried earlier? The answer Keynes gave to
this question was that there was a lack of theoretical understanding among the
capitalists, which is why they viewed State intervention with suspicion or
hostility. Once they develop a correct understanding of what produces demand
deficiency, which he thought his theory had provided, then hurdles against State
intervention in “demand management” arising from capitalists’ opposition, would
disappear.

Of course, even if they were armed with such an understanding, the capitalists
in their individual capacity could not overcome demand deficiency. They had to
act in conformity with their “private rationality” (making as much profit as
possible) because that is what the market forced them to do. Overcoming demand
deficiency required therefore the effort of a supra-individual entity, the
capitalist State. And capitalists, though unable to act against demand
deficiency in their individual capacity, would not oppose such an effort by the
State once they acquired a correct understanding. Individual capitalists in
short were necessarily trapped within the realm of “private rationality”; the
only entity that could act in accordance with “social rationality” was the
State.



STATE AS AN

EXTERNAL ENTITY

This however necessarily meant that the State had to act not in keeping with the
dictates of the market, not in conformity with market criteria, not in imitation
of the market participants, but wholly independent of the market. It had to be
in short an “outsider” to the market. And appropriate institutions had to be put
in place within the system to make this possible. For several years after the
war, capitalism did have such institutions in place, of which at least three
deserve mention.

The first was State control over cross-border capital flows, which ensured that
the State could act without fear of triggering capital outflows, ie, unconcerned
with what “disgruntled” financiers, who might otherwise have taken their funds
out, thought of its actions. The Bretton Woods system allowed countries to have
capital controls and all of them did have such controls in place.

The second was that State borrowing to finance the fiscal deficit was not
necessarily dependent on “market sentiments”. The central bank of the country,
in its capacity as the underwriter and manager of public debt, picked up
whatever portion of the public debt was not subscribed to by the market. This
meant that the government had a free hand in running fiscal deficits without
worrying about what the “market” thought about the size of this deficit.

The third was that State expenditure was undertaken in many spheres without the
same criteria being applied for judging the worthwhileness of such expenditure
as would be applied in the case of private expenditure. Many of these spheres in
any case, such as education and health, were primarily within the public domain,
so that even the question of comparing the performances of public and private
service providers did not arise. And the idea of public providers having to make
profits, or raise their own resources, was never entertained. The freedom of the
State to spend without being constrained by the “market” gave it a certain
leeway to spend as it liked.

All these institutions are now gone. Globalisation of finance now means that the
State is constrained with regard to the policies it follows for fear of losing
the “confidence” of “international investors”; and since such “investors”, like
finance capital traditionally, prefer “sound finance”, ie, balancing budgets, or
at the most running a small fiscal deficit (typically 3 percent of the GDP),
most countries now have “fiscal responsibility” legislation that limits the size
of the fiscal deficit. Likewise, central bank “autonomy”, not just de jure but
de facto, means that public borrowing has to obey “market sentiments”. Indeed,
in groupings like the Eurozone, the fact that the central bank itself is
completely outside the purview of the nation-State, has further reinforced this
dependence of the State on “market sentiments” for its borrowings. And with
privatisation of services, itself a result of the curbs on State spending,
public service providers now have to fend for themselves, and are therefore in
competition with private ones.



PRISONER OF

THE MARKET

What all this means is that the State, far from being an “outsider” to the
market, far from being an embodiment of “social rationality” that could
intervene to rectify the functioning of the market which constituted the domain
of “private rationality”, as the liberal economic theorists of the second strand
had visualised, has itself become a prisoner of the market. It has become
absorbed as a market participant to a point where Moody’s had once even
downgraded the credit rating of the US State. In terms of the liberal
perspective in short, the State has got incorporated into the market, and is no
longer an external entity that can enforce a different “rationality” upon the
system.

If the first strand of liberal economic theory was indeed correct, ie, there was
no need for State intervention, and that capitalism operated in a way that
ensured full employment and efficiency, then this “incorporation of the State
into the market”, or an “annexation of the State by the market” (which, from a
Marxist perspective, is nothing else but international finance capital
pressurising the State to act exclusively in accordance with its demands), would
not matter. But this claim, which is actually put forward as ideological defence
of the “annexation of the State by the market” is obviously an absurd one. The
prolonged capitalist crisis which even today keeps at least 11 percent of the
work-force unemployed in the US (the position is worse in Eurozone and the third
world) testifies to the absurdity of the claim.

Since the first strand of Liberal economic theory in defence of capitalism is
wrong, and since the second strand of theory is infructuous, because State
intervention to rectify the ills of the system, upon which it had pinned its
hopes, cannot be resorted to owing to the “incorporation of the State into the
market”, it follows that there is no liberal counter-argument against socialism
today.

Socialism to be sure has to update its own theory; and the socialist movement is
yet to pick up momentum. But the environment within which it has to address
these tasks is one where there is no credible liberal theoretical opposition to
it.


In
Peoples Democracy
http://peoplesdemocracy.in/2015/1220_pd/liberal-defence-capitalism
December 20, 2015