One of the central paradoxes in economic theory relates to the hostility
that financial interests in a modern capitalist economy systematically
display towards any policy of enlarged State expenditure financed by borrowing,
even though such expenditure increases capitalists’ profits and wealth.
Let us suppose that the government undertakes a larger borrowing-financed
public expenditure programme, and that all borrowing is from domestic
sources. Then corresponding to the increase in government borrowing, there
must be an equivalent increase in the excess of private savings over private
investment. Since private investment expenditure is more or less given
in any period, a result of past investment decisions, a rise in government
borrowing creates an equivalent increase in private savings. Since such
savings depend upon post-tax profits (surplus), there must be a rise in
post-tax profits (surplus); and what is more, this rise is some multiple
of the rise in government borrowing.
An example will clarify the point. If, say, one-half of post-tax private
profits (surplus) is habitually saved, then a rise in government borrowing
by Rs.100 at base prices will raise private surplus by Rs. 200 at base
prices in order to generate Rs.100 of private savings to finance itself.
This will happen in a situation of less than full employment through an
increase in output and employment, while the base prices themselves remain
more or less unchanged; in a situation of “full employment” (supply constraint)
this will happen through profit inflation squeezing out “forced savings”
from the workers. The capitalists as a whole in other words earn an additional
amount that is a multiple of the increase in government borrowing.
In his book How to Pay for the War, the well-known English economist John
Maynard Keynes had called this additional profit of the capitalists “a
booty” that fell into their lap. He was talking about increased government
borrowing to finance war expenditure in a situation where the scope for
raising output and employment was limited, and he was assuming that the
whole of the additional profits accruing to capitalists was saved. In
such a case, if government expenditure rose by Rs.100, then there would
be inflation that would squeeze workers’ consumption, and simultaneously
boost profits. Hence, while the actual resources for meeting war expenditure
came from the workers whose consumption was reduced by an equivalent amount,
the capitalists’ wealth increased by Rs.100 despite their having done
nothing. It is as if the government snatched away Rs.100 from the workers,
put it in the lap of the capitalists, and then borrowed this Rs.100 from
them. The real “sacrifice” for the war in other words was made by the
workers, while capitalists’ wealth went up gratuitously. The “unfairness”
of this had prompted Keynes to argue that even if the government had to
snatch away Rs.100 from the workers, the capitalists must not be handed
over this amount as “booty”, i.e. war expenditure must be financed through
taxes.
In Keynes’ example, supplies could not be increased and hence the rise
in profits occurred through inflation. But if supplies can be increased
then larger government borrowing still increases the magnitude of profits,
but through an increase in output not prices. Larger government borrowing
in short invariably boosts capitalists’ profits and wealth.
But this brings us back to the question that if a borrowing-financed increase
in government expenditure hands over a “booty” to the capitalists that
is some multiplier (greater than or equal to one) times this expenditure
increase, then why are the financial interests opposed to such an increase?
Why for instance do they favour the principle of “sound finance” and insist
on the passage of Fiscal Responsibility Legislation everywhere to limit
the size of the fiscal deficit?
One can give certain obvious economic explanations. The first is the fear
of inflation. Larger government expenditure by raising the level of aggregate
demand will cause inflation which will lower the real value of all financial
assets, something which finance capital obviously dislikes. This explanation
is not without weight, but it fails to explain why the opposition to borrowing-financed
government expenditure should persist even in the midst of a Depression
when the increase in aggregate demand is likely to cause almost exclusive
output adjustment with very little impact on prices.
The same holds for the other possible economic explanation for their opposition,
namely a fear of worsening of balance of payments and hence of a depreciation
of the currency, which again would lower the value of financial assets,
but in terms of other currencies. A whole lot of measures, however, ranging
from import controls to increased external borrowing, are available to
the government that is stimulating the economy. These measures can keep
the fear of any currency depreciation at bay. The fear of currency depreciation
therefore cannot also be an adequate explanation.
It follows then that economic explanations for the opposition of finance
to increased borrowing-financed government expenditure are inadequate.
The real basis of the opposition is political. As the Marxist economist
Michael Kalecki had once remarked, profits are not everything for the
capitalists; their class instincts too are important. And these class
instincts tell finance capital that a proactive expenditure policy of
the State, even for the purpose of demand management, is detrimental to
the long-term viability of the system in general, and of the financial
class in particular.
The mythology propagated by capitalism is that the unfettered functioning
of the system gives rise to a state of full employment where the resources
are efficiently allocated. This myth of course cannot be sustained, since
even the most die-hard believer in the ideology of capitalism cannot deny
the real-life existence of periodic Depressions and the virtually perennial
state of demand-constraint that afflict the system. Depressions are usually
explained in bourgeois theory in terms of a setback to the “state of confidence”
of the capitalists. It follows then according to bourgeois theory that
if a capitalist economy is doing poorly then the remedy for it lies in
providing greater support and concessions to the capitalists so that their
“confidence” will revive, and with it the economy.
But if government expenditure can be used to revive the economy, then
“the state of confidence” of the capitalists ceases to be of paramount
importance. The very fact of the economy’s revival will itself, if anything,
bolster their “state of confidence”; and even if their “state of confidence”
is not revived fully, the government can still stabilize the economy at
a high level of employment. What is more, since the adverse effect of
government measures for reducing income and wealth inequalities in society,
like profit taxation or property taxation, on the “state of confidence”
of the capitalists, can be counteracted by government expenditure, so
that unemployment need not result from such measures, the government can
adopt them with impunity. Thus a government that can use public expenditure
to sustain the level of activity in the economy need not bother much about
the “state of confidence” of the capitalists and hence can bring about
far-reaching changes in the system, including, where necessary, the induction
of public enterprises.
There is no reason why such public enterprises should be any less “efficient”
than private enterprises in an engineering sense, i.e. in terms of physical
input use; but even if perchance they are, an economy, with public enterprises,
functioning close to “full employment” will still have a larger volume
of goods at its disposal for given input endowments than a free market
capitalist economy. In short the “social legitimacy” of capitalism gets
seriously compromised by the fact that State expenditure can take the
economy to near-full employment irrespective of the “state of confidence”
of the capitalists.
In a modern capitalist economy the barometer for the “state of confidence”
of the capitalists is the state of exuberance of the stock market, i.e.
the state of euphoria of the financial interests. If State expenditure
can sustain a near-full employment level of activity in the economy, then
the exuberance of the financial capitalists ceases to be a matter of much
concern. Governments can pursue whatever policies they consider socially
desirable without having to concern themselves with the impact of such
policy on the exuberance of the financial capitalists.
True, the maintenance of the economy at near-full employment may cause
accelerating inflation because of the exhaustion of the reserve army of
labour, but governments, under working class pressure, may become emboldened
to attempt to resolve such problems through even more radical measures,
such as prices and incomes policies, nationalizations, workers’ management
of factories etc. Once the “state of confidence” of the capitalists is
given short shrift, then there is nothing to prevent the economy’s ideological
“slide” to radical social engineering and even to socialism.
It is vital for finance capital therefore that the ideological weight
of the proposition that the “state of confidence” of the capitalists is
crucial for the well-being of society is not diminished one iota, for
which the proposition that State expenditure can boost employment with
impunity must be attacked, no matter how flawed in logic the attack may
be.
This fact has a direct bearing upon the question of recovery from the
current world recession. The need for increasing government expenditure
for overcoming this recession is widely recognized. And it is also recognized
that it is better for recovery if this increase in government expenditure
is coordinated across the major countries rather than being sequentially
undertaken in an uncoordinated manner by individual countries.
But no such initiatives for recovery can be undertaken because of the
opposition of the financial interests to fiscal deficits. It is significant
that at the G-20 meeting in end-March there was no mention of any fiscal
stimulus, let alone of any coordinated fiscal stimulus. While in the immediate
aftermath of the financial crisis, in September and October, there was
much talk of a coordinated fiscal stimulus, that talk has died down now.
True, the United States and China have announced what appear at first
sight as sizeable fiscal stimulus packages. But the actual stimulus in
the United States, at least, as distinct from the increase in fiscal deficit
caused by the maintenance of government expenditure in the face of a decline
in tax revenue, is quite small. This is because much of the increase in
federal government expenditure announced by the Obama administration as
part of its stimulus package will merely offset the curtailment in government
expenditure in the various States of the U.S. on account of the decline
in their tax revenues.
By contrast, the “bail out” package to the financial system in the United
States is estimated to exceed $10 trillion. The strategy at present therefore
seems to be to sustain the financial system and wait for the next “bubble”
to appear rather than to revive the real economy directly through fiscal
stimuli. The consequence of this strategy will be a prolonged period of
recession and unemployment with much human suffering; but this only underscores
the power of the financial interests in contemporary capitalism, where
even a crisis of this magnitude engendered by their functioning leaves
this power undiminished.