International Development Economics Associates (IDEAs) organised a two day conference on ‘The Value of Money in Contemporary Capitalism’ in New Delhi on 12th and 13th of September.

The conference was meant to address issues around the role of money in contemporary capitalism, in both national and international contexts. The starting point was a new book by Prof. Prabhat Patnaik (Jawaharlal Nehru University, New Delhi), a renowned Marxist macroeconomist, entitled “The Value of Money” (Tulika Books and Columbia University Press 2008) which was released around the same time. This book provides a logical critique of monetarism, which has become the dominant stream of contemporary macroeconomics. However, it is a critique along lines very different from what is generally advanced. As against the monetarist view that the value of money vis-à-vis commodities is determined by demand and supply of money, it argues that the value of money is given from outside the realm of demand and supply.

The first part of the conference focused on a consideration and assessment of the arguments made in the book, at both theoretical and empirical levels. The second part of the conference was devoted to analyses of recent tendencies in money, finance and real economies in particular countries and in the world economy.

About 170 participants from India and around the world took part in the conference. The group included academicians, policymakers and students. Many members of the civil society were also present. Apart from the formal discussion, informal exchanges among the large number of participants during the course of these two days were passionate and productive.

DAY 1, 12th September 2008

Opening Session

The two-day long conference begun with opening remarks from the Chair, Pasuk Phongpaichit, Chairperson, IDEAs and Professor, Department of Economics, Chulalongkorn University, Bangkok, Thailand. She opened the discussion saying a few words about the network IDEAS and its growing reach among heterogeneous economists from all over the world. Talking about the conference Pasuk Phongpaichit said that the conference is about scrutinising the role and determinants of money and capitalism with USA as a hegemonic power.

Jayat Ghosh, Professor, Centre for Economic Studies and Planning, JNU, New Delhi and Executive Secretary, IDEAs, introduced Prabhat Patnaik’s book ‘The Value of Money’ by listing out the various challenges posed by the book to existing mainstream economics. Jayati Ghosh pointed out that the central theme of the book is to analyse the determinants of money and then it goes on to critique the exogeneity aspect of the determinants. The book challenges the different concepts of money, specifically the monetarist view on money and discusses ‘money’ in the Marx-Keynes-Kalecki framework.

Prabhat Patnaik, Professor, Centre for Economic Studies and Planning, JNU, India, outlined the main themes developed in this book. Prof. Patnaik highlighted the difference between monetarist and ‘propertyist’ traditions on the question of the determinants of value of money. In the monetarist tradition, Prof. Patnaik argued, money is viewed as a medium of circulation and its value is determined by its excess demand. In the propertyist tradition, that includes the views of both Marx and Keynes, money is also viewed as a form of property or a form of holding wealth. Prof. Patnaik argued that the medium of circulation role of money cannot be separated from its role as a form of holding wealth. Money cannot act as a medium of circulation if it is also not a form of holding wealth. However, once the role of money as a form in which wealth is held is recognised, the possibility of realisation or effective demand problem also has to be acknowledged.

Prof. Patnaik further argued that the propertyist tradition is incomplete because it does not explain why, in spite of its inherent tendency towards the realisation problem, capitalism has operated in a viable and stable manner over long stretches of time. Patnaik contended that it is the existence of a pre-capitalist sector, which provides both cheap inputs and markets to the capitalist core that provides stability to the system. He argued that the pre capitalist sector provides cheap inputs to ensure stability of the value of the currency used internationally, namely dollars. This theory of the value of money in capitalism therefore logically leads to a theory of imperialism. This leads Patnaik to a discussion of the international monetary system. He argues that even while the world economy may appear to have done away with commodity money by de-linking the US dollar from gold, in fact it can never actually do so. The value of money, even paper/credit money, arises because of its link to commodities. Stability in the international monetary system requires the persistence of the confidence of the capitalist world’s wealth-holders in the leading economy’s currency as a stable medium for holding wealth, and this depends on the continued perception of global hegemony of the leading economy. Patnaik refers to the current international monetary regime as the oil-dollar standard, and provides an explanation for the Iraq war in terms of the need to stabilise the oil-dollar standard. This explains the present drive by the US to establish control over oil. The control over oil by US instils confidence among international investors over the value of dollar.

Session 2: Responses 1

Chair: Utsa Patnaik, Professor, Centre for Economic Studies and Planning, JNU, New Delhi, India

Speakers: Jan Kregel, Anjan Mukherjee, Robert Pollin

Opening remarks on his book by Prabhat Patnaik were followed by responses from Jan Kregel, Anjan Mukherjee and Robert Pollin.

Jan Kregel, Senior Scholar, Levy Economics Institute of Bard College, USA, in his note: “The Value of Money in Contemporary Capitalism: Draft of Remarks” argued that while Patnaik’s book is presented as a book on monetary theory, it is a book about economic policy as well. In this regard, he highlighted the role of Employer of Last Resort (ELR) programmes. He argued that such programmes, by offering employment to anyone who is willing and able to work at a given wage, not only solve the problem of unemployment but by fixing a base for the wage also set the base for the price system. Prof. Kregel, however differed with Prof. Patnaik on the latter’s assertion that at the international level we are still employing a commodity money standard or what Patnaik called the oil-dollar standard. Prof. Kregel argued that the recent increase in oil prices has been due to increased financial speculation and not due to increase in demand caused by greater industrialisation in parts of Asia. This, according to Kregel, suggested that US financial interests, who should have a clear interest in supporting the value of the US dollars and international currency, did not recognize that their actions would eventually undermine their position according to Prof. Patnaik's interpretation.

Prof Mukherji talked about chapter 2 and chapter 4 of Prof. Patnaik’s book. He argued that in a single period three sector model, the important thing to look at is the existence of the equilibrium rather than the stability of equilibrium. He further argues that in such a model if equilibrium exists it will in all likelihood be unique. Due to ambiguity in the sign of the excess demand function, the assumption of gross substitution cannot be made. Prof Patnaik makes this assumption. He contends that without this assumption also, lot can be said about the stability of the equilibrium. Since the trace of the matrix that one gets after double differentiating the excess demand function is negative so the equilibrium will be locally stable. But to study the global stability of the equilibrium, he argues, one needs to study phase diagrams. He further argues that in all cases it can be shown that if equilibrium exists then it is bounded and bounded away from zero. It is true for the case of saddle point also. Therefore, according to him, the endeavor should be to look for the existence of the equilibrium in this kind of model. Suppose equilibrium does not exist then two possibilities arises, one in which the prices converge to zero, that is the value of money goes to infinity. The other is the value of money going to zero. These are the two possible cases discussed by Prof Patnaik in his book. These cases arise because of the non existence of the equilibrium so the question of stability does not arise. If we want to study the value of money, Prof Patnaik’s model in Chapter 2 is not appropriate; rather one should take an inter-temporal model.

In his paper “Considerations on Interest Rate Exogeneity”, Robert Pollin, Co-director, Department of Economics and Political Economy Research Institute (PERI), University of Massachusetts-Amherst, said that he agreed with most of the conclusions reached by Prabhat Patnaik. However, he also had some points on which he differed with Patnaik. First, he pointed out that the book ignores the role of central banks and financial innovation in driving the money supply process. Second, he argued that the role of the pre-capitalist sector in Prof. Patnaik’s book is perhaps exaggerated. Processes internal to capitalism, such as the maintenance of the reserve army of labour can keep prices stable. He also argued that aggregate demand can be boosted through government expenditure, bourgeoisie’s consumption etc. Hence, pre-capitalist sector is not a logical requirement for capitalism to ensure stability and growth. Finally, he stressed the importance of overcoming the realisation crisis through clean energy investments, in the context of threats posed by climate change.

Session 3: Responses 2

Chair: Jan Kregel, Distinguished Research Professor, Centre for Full Employment & Price Stability, University of Missouri, Kansas City, USA and Senior Scholar, Levy Economics Institute of Bard College, USA

Amiya Bagchi, Director, Institute of Development Studies, Kolkata, India, in his paper “Money under Capitalism: Domestic, Universal”, argued that much of the theorizing of money under capitalism relates to a developed economy. Thus, he argued that there is no history of finance and money from the point of view of the poor. Even in systems where there is more than one type of commodity money, the one used by the poor is the one which has the least amount of acceptability. However that money cannot work beyond the domestic sphere. One can have domestic money entirely based on trust but cannot have a similar form of international money because an international money requires an acceptance beyond the domestic circuits of trust. Therefore throughout the period of development of capitalism, the competing capitalist states have sought to control the form of money which has the largest degree of acceptability in the arena of international exchange. The power seeking hegemony has always sought to make its domestically acceptable currency the hegemonic currency in the world. Therefore the money used by the weaker economies has also been made the weaker currencies.

S. L. Shetty, Director, EPW Research Foundation, Mumbai, India, in his response to the theme put across the point that finance capital is one of the important ways of establishing strategic infringement of imperialism. In the context of India his paper “India’s Economic Structure and Financial Architecture: A Growing Mismatch” makes the point that over time the financial infrastructure of the economy has not moved in consonance with the changing economic structure of the economy. A comparative analysis of pre-reform and post-reform periods in India shows that changing public policies themselves have been the main source of stress in the financial system.

In the discussion on his paper, “The Value of Money and the Theory of Imperialism”, Dr. Prasenjit Bose, Convenor, Research Unit, CPI (M), New Delhi, India, said that the book by Prof. Patnaik opens up new vistas for understanding the nature of development of capitalism. At the same time, he felt, the two main problem of Prof. Patnaik’s analysis was that, first, the role of the state has been analyzed solely in terms of demand management and second, military expenditure as an important expenditure of the state has been glossed over in the book. Also, the theory of imperialism, as proposed by Prof. Patnaik in the book, should be put to the test of praxis. For that, Dr. Bose said, it is essential to explore the nature of the relationship between different exploited classes.

Session 4: Panel Discussion

Chair: Anil Bhatti, Professor, Centre of German Studies, School of Language, Literature and Culture Studies, Jawaharlal Nehru University

Speakers: Abhijit Sen, Charles Abugre, Chris Baker, Patan Khasnabis

Opening the discussion Abhijit Sen, Member, Central Planning Commission, India and Professor, Centre for Economic Studies and Planning, JNU, New Delhi raised three main issues. The first is a discomfort with the idea that there cannot be a closed capitalist system, a discomfort that has been borne out of the fact that we have been subjected to models of closed systems. A great deal of money is used to finance wars, aid, etc. which is actually state spending, signifying some kind of fiscal policy. As long as we can allow the state to do these, there is no need for pre-capitalist economies. Therefore the capitalist state can take care of its own crisis while working as a closed system without any intervention from outside.

Second, seen in terms of the world economy today, the idea of money as commodity money, specifically as oil money, though attractive, seems to be somewhat inconsequential to the current behaviour of the world economy. The approach taken by Prof. Patnaik therefore does not help in demystifying things for the following three reasons:

(i) After the neoliberal takeover, a huge rise of finance capital happened through successive bubbles in various assets. The relationship between money and these asset markets need to be spelt out.

(ii) The present capitalist leader is in debt, predominantly to countries that sell goods to it. It allows other countries to run current account surpluses. In this context, it is important to consider the question of the undervalued exchange rate of its trading partners, especially China, which refuses to let its currency to appreciate.

(iii) The immediate past has seen a huge commodity boom, with finance moving from one set of assets to another. The past 18 months’ events cannot be termed as any long term tendency. Even as the oil-dollar pedestal is the building block of Prof. Patnaik’s ideas, the US does not think of oil as that important except on the supply side.

Third, he made some remarks about the Indian case:
The Raghuram Rajan Committee report on financial reforms talks about “growth and inclusiveness”. Too many people are excluded from the financial system. How do we bring them into the financial system? For the Indian capitalist class, this could be thought of as necessary. But that’s not it. The discourse within peripheral capitalism does not seem to recognize any relationship on which Prof. Patnaik puts so much emphasis.

Is it not the case that governments have moved away from fiscal policy management?
Moreover, today wages are very sticky. Real wages in the capitalist sector have hardly increased. BPOs, etc cannot be seen as safety valves as Patnaik would have it. These merely utilise existing reserve armies. In this context, how should we blend the idea of imperialism to the idea of the closed capitalist economy which is what capitalism is all about?

Charles Abugre, Head, Policy and Advocacy, Christian Aid, London, UK, was of the opinion that Prabhat Patnaik’s argument that stability of the capitalist economy lies in the degradation of the pre-capitalist economy that resides together with capitalist economic structures was particularly interesting. But he questioned whether and to what extent questions it is possible to make a clear demarcation between capitalist and non-capitalist economy in reality. Abugre pointed out that such a demarcation may be plausible in case of a country like India, which has faced a rapid economic transformation. This is, however, not true for countries in West and East Asia. Those economies stand testimony to continuous decay and diffusion of new modes. As a result, there arise intermediate class structures. Secondly, he argued that Patnaik’s book has suggested socialism as the necessary solution to the present problem but the solution does not emerge as an inevitable outcome of the theorization of the same.

Chris Baker, Independent Researcher and Writer, Bangkok, Thailand, made the point that it is not possible to talk about the global economy without talking about practice. He raised the question whether it is realistic to make a stark division between capitalist and pre-capitalist economy in today’s world. Patnaik’s theory, Dr. Baker opined, does not incorporate the diffusion of capitalism. Capitalism degrades the precapitalist economies, but not till the point until the whole system fails. If we look at the examples of economies in Latin America, Africa and Asia, both degradation and diffusion have been going on in parallel.

Patnaik produces socialism out of the hat, as essential but not inevitable. Does this ambitious re-casting of the ideas about world capitalism give us any idea about the political organization required to put this into practice?

Ratan Khasnabis, Professor, Department of Economics, and Dean, School of Business and Management Studies, University of Kolkata, West Bengal, India, began by saying that he agrees with Patnaik’s critique of neoliberal economic theory. Patnaik’s world is the world of sticky prices of Marx, Keynes and Kalecki. To Khasnabis, the Marxian stand is more convincing, as it does not bind the model to the short term. It can be used to build a model keeping in mind long term consequences.

Maintenance of a minimum rate of profit is required for the sustenance of capitalism. For the viability of the system, pre-capitalist sectors are needed to provide stimulus to investment and as a repository of labour reserves.

But the stimulus to investment might come from within. The Schumpeterian innovation ‘creative destruction’ fits well with the Marxian model of capitalism. Marx had argued that competition among capitalists leads to concentration and centralization of capital. The process is facilitated by innovation. Innovators eliminate the competitors, which is achieved by reducing the cost of production. Hence profitable lines of production can be maintained to an extent.

Lenin had pointed out that underconsumption is a reality, and that it could be the cause of crisis. The motive of capitalists is to increase the organic composition of capital. A way out of crisis is to take up investment in Department II, though it may lead to dis-proportionality crisis. There is a big differential between wages of workers in capitalist economies and the third world. Within a capitalist economy itself, there are low-valued products (with low organic composition of capital, for instance, agricultural products) and high-valued products (with high organic composition of capital, such as infotech), which explains the wage differentials within the capitalist system.

The welfare loss of the above-mentioned strategy will be high. But interventions from the other side, namely labour, reset the agenda. The system inflicts tremendous welfare loss on society. Socialism as such does not come naturally from within.

DAY 2, 13th September 2008

Session 1: Money and Monetary Policies in Capitalist Economies

Chair: S K Thorat, Chairman, University Grants Commission, New Delhi, India.

Speakers: Erinc Yeldan, Sunanda Sen and Jyotirmoy Bhattacharya

Erinc Yeldan, Professor, Department of Economics, Bilkent University, Ankara, Turkey, in his paper titled, “Beyond Inflation Targeting: Accessing the Impacts and Policy Alternatives for Employment Creation and Economic Development”, highlighted the effects of the orthodoxy’s obsession with inflation targeting at the cost of macroeconomic variables such as employment. The economics behind inflation targeting which explicitly commits itself to attain price stability is in fact nothing but the management of expectations, where the market participants are like Roman gods and goddesses who need to be kept happy at all times.

The obsession with maintaining price stability in the absence of nominal anchors has compelled the Central Bank to concern itself solely with inflation targeting under the pretext that the latter cannot influence the real side hence it would be best to return to monetary economics. Even while the ILO statistics suggest that more than 186 million people across the world are unemployed, 22 percent of the developing world’s workers earn less than a dollar a day and 90 percent of the labour employed in merchandise trade suffer from informalisation, the mainstream’s dogma of inflation targeting has replaced employment creation on the direct agenda of almost all countries.

The role of financial globalization which merely redistributes investible funds rather than accelerate accumulation as a source of instability cannot be ignored and merely targeting price stability will be insufficient. He argued that what we really need is macroeconomic stability.

Yeldan pointed out that although inflation needs to be controlled we need to focus on income redistribution. The focus on inflation targeting which is primarily situated in a world where inflation is solely attributed to wage push fails to take note of the phenomenon of imported inflation and takes away powers from the powers of the Central Bank. When control over other instruments such as exchange rates is taken away, targets then become difficult to achieve.

Yeldan suggested alternatives such as the use of the Pasinetti Rule which implies setting the interest rate to the rate of growth of labour productivity. Taking from a study by Pollin and Zhu which found out that higher inflation rates are associated with moderate gains in GDP growth upto a roughly 10 to 15 percent inflation threshold, he stresses the need to have case specific thresholds for different kinds of inflations.

In her paper titled “On Trade-Off and the Impossibility”, Sundanda Sen, Professor Emeritus, Department of Economics, Jamia Millia Islamia and Professor (retired), Centre for Economic Studies and Planning, JNU, India, stated that in a globalized world, where there is capital account convertibility and exchange rates are subject to market forces, monetary policy which is subject to the changes in capital inflow and exchange rates becomes an inffective instrument in the hands of the Central Bank.

To spell out the course of action, with CAC, the import of capital leads to capital appreciation. Where the exchange rate is not allowed to appreciate too much, there is some capital absorption which leads to a rise in prices and increase in interest rates. As interest obligations have to be met and fiscal deficit increases are not acceptable, the axe falls on the primary deficit or in other words expenditure cuts are enforced. CAC is an integral part of deregulated finance where the Bank of International Settlement Rules makes it compulsory to comply with Capital Adequacy Ratio (CAR) and CRPR which reduces lending to sectors like agriculture and small sectors. Where financial securities are considered more profitable than industrial securities in a world where a range of assets are available and corporates prefer to invest in financial assets due to the presence of ESOPs and the need to show better balance sheets, inflation targeting is resorted to only to protect the interests of finance capital.

Jyotirmoy Bhattacharya, Assistant Professor, IIM, Kozhikode, in his paper on “Oil Shocks: How Destabilising are they for a contemporary Capitalist Economy?" begun by arguing that reaction of the world economy to oil shocks has changed significantly in the last two decades. He pointed out that inflation due to oil shocks in the seventies was higher and even led to stagflation as compared to the nineties where the impact on inflation has been more muted. Neo classical models do a very bad job of explaining this differential response of inflation to oil shocks in the two different decades.

At a time when money is not fiat and is linked to oil in what is called the Oil-Dollar Price and it has been argued that oil price increases have been mainly due to speculation, the relatively reduced impact of oil shocks in the 90s on inflation in the developed world has been due to the availability of cheap imports from China and the access to the cheap labour reserves of the developing world. Notwithstanding the fact that imperialist powers have a need to control oil to ensure price stability, Bhattacharya establishes that price stability due to fluctuations in oil may not be as crisis causing as before.

Session 2: Finance and the Real Economy

Chair: Robert Pollin, Co-director, Political Economy Research Institute at the University of Massachusetts, Amherst, USA

Speakers: Esteban Perez Caldentey, Nirmal Chandra

Esteban Perez Caldentey, Economic Affairs Officer at ECLAC, Santiago, Chile, began the presentation of his paper “Trade Openness, Financial Liberalisation and Volatility” by discussing the limitations of neoclassical economics in dealing with money. The neo-classical theory cannot function with money as a medium of exchange. But it is difficult to conceive the functioning of an economy of exchange with a great number of goods and of private property owners, without an efficient exchange system. An exchange economy presupposes ‘something’ to record and settle transactions with. Intertemporal models made ‘that implicit something to settle transactions’ an explicit component of their models by introducing money as a medium of exchange from ‘outside’. This was achieved by appending a quantity theory equation to the ‘real equations’ of general equilibrium. While people starting with Patinkin (1956), Clower (1965, 1967) and Wallace (1980) did this, introducing money as a means of exchange negates the very purpose of intertemporal equilibrium. Esteban then offered an analysis of the last part of Prabhat Patnaik’s book by incorporating a discussion on the inter-temporal approach to open economy macroeconomics. Intertemporal approach in essence transfers the intertemporal utility maximisation of households onto the sphere of countries. The current account balance is thus ‘a facet of the market for intertemporal trade in goods and services’. The capital account exists to ‘support’ the gains from trade in goods and services. The prediction of this theory is that capital should flow from capital abundant developed countries to developing countries. However, based on empirical evidence from the Latin American countries, Esteban Perez showed that net resource flow is moving from the South to the North. He argued that this has been happening due to repatriation of profits and incomes. He concluded by arguing that it is not trade that drives finance as in intertemporal models rather the causality is in the reverse direction.

Nirmal Chandra, Professor Emeritus, IIM, Kolkata, India, in his paper "Is Inclusive Growth Feasible in Neoliberal India? Some Preliminary Notes on Fiscal and Credit Policy", spoke on the changing fiscal situation In India in recent years. He noted that there has been an improvement in tax to GDP ratio in recent years. Prof. Chandra argued that improvement in the tax to GDP ratio cannot be attributed to the fiscal policy stance adopted by the government but has taken place due to sudden rise in world oil prices. He also pointed out that there has been no increase in the ratio of tax to non-agricultural GDP. He argued that the indirect taxes have fallen due to reduction in import duties. The corporate income tax has increased moderately, but at the same time because of a number of tax-exemption provided to the corporate sector, the effective tax rate in the profit share of the corporate sector has gone far below the statutory rate. He also drew attention to large number of tax sops given to the corporate sector. Different tax sops provided by the Centre and the States not only lead to a loss in potential tax revenue but also give rise to high economic inequality in the society. The low tax base of the government and its adherence to neoliberal FRBM act has greatly reduced the scope of undertaking developmental expenditure in the economy. The speaker ended his speech by raising an important aspect of the recent high growth phase in India. According to him, one of the main driving forces of achieving higher growth rate is the increase in the luxury consumption by the high income groups and different tax sops given by government to promote such consumption which means that while this can work for a short time, there is a natural limit to this process.

Session 3: Open Forum

Chair: C P Chandrasekhar, Professor, Centre for Economic Studies and Planning, JNU, New Delhi and Member, IDEAs’ Executive Committee

In the open forum, Prof. Chandrasekhar summarized some of the issues that came up for discussion in previous sessions. Prof. Chandrasekhar argued that the issue that was intensely debated was the logical necessity of the pre-capitalist sector in closing demand constrained capitalist system. In this regard, he himself proposes that in recent times finance may also have provided exogenous stimuli to the system. He draws attention to the credit financed expenditure booms in stimulating aggregate demand. He also argued that oil-dollar standard proposed by Prof. Patnaik was also much debated. He argued that the fact that high rates of growth are experienced only by few developing countries can be brought into the analysis in explaining the continuing confidence in dollar. He argued that China was holding large idle dollar reserves that it can use to stimulate domestic growth. But it is holding these large reserves at rates of growth that are already very high.

Next, Prof. J. Kregel explained the Keynesian approach to money. According to him, anything for which liquidity premium exceeds carrying cost can serve the role of money. Money, in this approach does not have a concrete referent; a worthless piece of paper can also serve the role of money. Therefore, Prof. Kregel differs with Prof. Patnaik who pegs the value of international money to a commodity viz oil. In explaining the current US drive for gaining control over world’s oil resources, Prof. Kregel argued that it was mainly driven by the personal interests of those who run the US administration rather than by the desire to ensure stability to dollar. He also argued that the recent increase in oil prices has been on account of financial speculation. It is not clear why financial speculators in US will undermine the stability of dollar by raising the price of oil.

Besides Prof Kregel, Prof. Bagchi and Prof. Pollin also made important interventions. Prof. Bagchi reiterated the role of pre-capitalist markets in ensuring stability and growth in capitalist world. Prof. Pollin highlighted the importance of green investments. Such investments will not only insure the world against threats posed by climate change but will also boost demand in the economy.

In his response, Prof. Patnaik once again emphasized the role of pre capitalist sector. He drew attention to the role played by colonies in fostering growth in capitalism in the nineteenth century. He also argued that demand supply conditions played an important role in determining the price of oil. He contended that control over non-renewable resources is essential for maintaining the value of dollar and in the present scenario, oil is the most important non-renewable resource.

September 22, 2008.