Non-Mainstream Dimensions of Global Political Economy

Essays in Honour of Sunanda Sen

Byasdeb Dasgupta

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9780415535007
• eBook ISBN: 9781135050757
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

The book is a collection of essays written by scholars of global repute in honour of Professor Sunanda Sen. Each paper is well-researched and offers some new dimension to the understanding of the current global crisis, finance and labour including the epistemological viewpoints regarding the current global order. The uniqueness of the book is that in one place one can find different heterodox positions dealing with the present global order of finance and labour – post-Keynesian, Marxist etc.

The contents of the book can be classified into three major sections – (1) global finance dealing with current global crisis; (2) methodological/epistemological concerns in terms of the global crisis, and (3) labour in the context of neoliberal global capitalism characterised by the process of financialisation. The entire book is an attempt to decipher the meaning and significance the process of financialisation produces for the real economy. One of the major conclusions drawn from the different studies in the book relates to the fact that global finance as it has been shaped today cannot delinked from the question of labour. The current global finance regime warrants neoliberal labour flexibility regime, the latter guaranteeing the necessary surplus generation for the pervasive finance.

This book offers an analysis of current global crisis relating it to the present-day global finance and labour in terms of the process of neoliberal financialisation a flexible labour regime. It is based on non-mainstream heterodox approach in Economics and as such is a critique of the mainstream neoclassical position on current global crisis. The contents of the book will be of immense use to the researchers and students dealing with current global crisis, global finance and labour.

1 Finance and growth under capitalism

Prabhat Patnaik

1 Endogenous and exogenous stimuli

Once we reject Say’s Law and recognize that capitalism is prone to deficiency in aggregate demand, we have to accept that sustained growth, in this system, requires exogenous stimuli. By exogenous stimuli I mean a set of factors, which raise aggregate demand but are not themselves dependent upon the fact that growth has been occurring in the system; that is, they operate irrespective of whether or not growth has been occurring in the system. Moreover, they raise aggregate demand by a magnitude that increases with the size of the economy, for instance with the size of the capital stock. They are, in other words, different from ‘erratic shocks’ on the one hand, and ‘endogenous stimuli’, such as the multiplier-accelerator mechanism, on the other: the latter can perpetuate or accelerate growth only if it has been occurring anyway.

‘Erratic shocks’ can explain the persistence of business cycles, and can produce more or less regular cycles even when the spontaneous tendency of such cycles is to die down, that is, for the oscillations to be damped; but they cannot explain growth. Cycles that keep going because of ‘erratic shocks’ can well occur around a stationary trend, so that if a positive trend is to be accounted for, then erratic shocks per se are inadequate for the purpose.

On the other hand, purely endogenous stimuli, whose operation is dependent upon the fact that growth has been occurring anyway, cannot explain this growth itself. They can explain the persistence of growth once it has been set in motion, but they cannot explain why the system does not remain stuck at a stationary state; and they also cannot explain why, if growth per chance falters for some reason, it should revive again. (Indeed, as we shall see later, the stationary state is the sole stable growth path in a system with only endogenous stimuli). By their very nature, since they are conditioned by the fact of growth itself, they cease to operate when the system is in a stationary state; they cannot be adduced as an explanation for the system experiencing a positive trend. Such an explanation can only be based on the operation of exogenous stimuli, that is, of stimuli that are not themselves dependent upon the fact of growth taking place.

This last point can be expressed differently. The original Keynesian multiplier was concerned exclusively with rounds of demand-stimulating effect of an initial increase in investment, via consumption alone. But, of course, demand stimulation through various rounds of consumption may also be augmented by demand stimulation via rounds of induced investment as well. This augmented multiplier, which takes into account the various rounds of demand stimulation through both these channels, was called the ‘super multiplier’ by John Hicks (1950) and the ‘compound multiplier’ by Oskar Lange (1943). In other words, an initial ‘autonomous’ increase in aggregate demand can cause, through its ‘super multiplier’ effects, an overall increase in aggregate demand that is several times its size and much larger than what the Keynesian multiplier alone would generate.

The ‘super multiplier’ effect of an initial increase in aggregate demand need not even be finite. An increase in income, in other words, may give rise to an increase in consumption and induced investment in each round, which together are greater than itself. Putting it in Keynesian parlance, the propensity to consume and the propensity to undertake induced investment may together add up to more than one: if an increase in income causes an increase in consumption that is c times itself and an increase in induced investment that is i times itself, then (c + i) may well exceed one.

But this fact, which means that successive rounds of additional demand generated do not keep shrinking (therefore tending towards zero), and hence that the total demand generated by an initial injection of demand is without any upper bound, need not make the system explode if the successive rounds of demand increase are not concentrated within a single period, but occur over several periods of real time. The typical assumption made in theoretical discussions is that the rounds of induced consumption effect work themselves out quickly (largely within the single period itself), while the rounds of induced investment effect work themselves out over several periods of real time. In multiplier-accelerator models, the induced consumption effects work themselves out fully within the single period, while each round of the induced investment effect occurs over one whole period.

But no matter how exactly these rounds occur through real time, endogenous stimuli refer exclusively to the super-multiplier effects of some multiplicand; they themselves do not constitute the multiplicand. Exogenous stimuli provide this multiplicand, and they can explain growth only if this multiplicand operates more or less steadily, and in ever growing magnitude.

The distinction I have been trying to draw can be expressed in yet another way. If we take Ragnar Frisch’s (1933) distinction between propagation and impulse problems (a distinction drawn in the context of business cycle theory, but relevant in the wider context of growth as well), then we can say that exogenous stimuli represent a steady and ever-increasing impulse, which alone can explain the growth of the system.

Once this distinction is clear, the basic argument of the present chapter can be expressed as follows: ‘finance’ itself cannot constitute an exogenous stimulus for growth in a capitalist economy. It may influence how powerfully an authentic exogenous stimulus may operate, and it certainly does influence the strength of the Frischian propagation effects, or the Hicksian super-multiplier effects, i.e. the strength of operation of what I have been calling the ‘endogenous stimuli’. But the exogenous stimuli that underlie sustained growth are something different, something outside of the sphere of finance. And if finance, while strengthening endogenous stimuli, has the effect of choking off the possible exogenous stimuli that capitalism can draw upon for its growth, then, notwithstanding occasional bursts of activity its operation may stimulate (which would be followed by equally severe crises), it will cause secular stagnation.

This, in my view, is precisely the predicament of contemporary capitalism, characterized as it is by the hegemony of finance. Such hegemony, no matter how much it may strengthen the operation of endogenous stimuli, has the effect of choking off the principal exogenous stimulus that contemporary capitalism can draw upon, namely State expenditure; it thereby gives rise to a tendency towards secular stagnation. Before proceeding further however, let us recapitulate the argument about the role of exogenous stimuli mentioned above.

2 The need for exogenous stimuli

The proposition that a capitalist economy without exogenous stimuli settles down at a stationary trend, which constitutes in fact the only stable trend (the ‘warranted rate of growth’ of Harrod provides an unstable trend) is an integral part of neo-Keynesian growth theory (see Kaldor 1970, Goodwin 1951), for which a rigorous demonstration was provided by Kalecki (1962). However, the origin of this proposition goes back to Rosa Luxemburg (1914, reprinted 1963). Rosa Luxemburg’s theory was flawed in many ways: she argued, for instance, that the entire surplus value of the capitalist sector had to be ‘realized’ through sales to the pre-capitalist markets, which is patently unwarranted and which called forth legitimate criticism from Nikolai Bukharin (Tarbuck 1972); but her basic insight that a capitalist economy, purely on the basis of endogenous stimuli, could not experience sustained growth was perfectly valid (Kalecki (1971) gives a simple exposition of her argument).

Kalecki’s own demonstration of this proposition (1962) was based on taking three different investment functions: his own 1954 version, Harrod’s 1939 version, and the multiplier-accelerator version. In all these versions, he showed that the only stable trend that could emerge from the dynamics of accumulation was a stationary trend. A positive trend, corresponding conceptually to Harrod’s ‘warranted rate of growth’, does exist, but it is unstable, in the sense that any slipping away from it brings the economy back to the stationary trend. Harrod himself had presumed that the instability of the ‘warranted growth’ path would give rise only to cyclical fluctuations around this path, i.e. that the trend growth rate through the cycles would coincide with the warranted rate, but this is erroneous. Cyclical fluctuations, even in Harrod’s own model, can occur only around a stationary trend.

This Kaleckian demonstration has been shown to hold for other investment functions as well (Patnaik 1997). But because any demonstration that endogenous stimuli alone cannot explain sustained growth has to take, for an elaboration of the argument, a specific investment function (or a specific set of investment functions), an impression can arise that the proposition is valid only for that specific investment function (or that specific set of functions). This, however, is wrong. The inadequacy of endogenous stimuli to explain sustained growth arises from the very fact that a capitalist economy can face a demand constraint, i.e. on the basis of any investment function that takes cognizance of this fact. Let us see why.

The reason why a capitalist economy is at all prone to facing a demand constraint lies in the fact that produced capital goods are not the only form in which people can hold wealth. In addition to capital goods, or claims to capital goods, wealth can also be held in the form of money. Since in any money-using economy, money can always be used as a form of holding wealth, such an economy can, in principle, face a demand constraint for produced goods, whose counterpart will be an excessive ex ante liquidity preference. Full employment/ full capacity in such an economy cannot obtain if, when full employment/full capacity output is produced, there is an ex ante excess supply of goods and a corresponding ex ante excess demand for money, which cannot be eliminated through price changes alone, either because money wages/prices are inflexible, or because their flexibility cannot get rid of this excess demand/supply. (It may on the contrary compound them further because of the economy’s inheritance of a plethora of debt commitments (Patnaik 2009)).

The same fact of the availability of money as a form of holding wealth that causes involuntary unemployment in any given period, also ensures that the level of investment in a dynamic sequence is decided by each capitalist on the basis of a calculation of the expected growth of the market. Since market-shares of firms can change at best slowly, adding to capital stock in excess of the expected growth of the firm’s market promises zero returns at the margin. True, this will not be the case if there are a lot of ‘marginal’ producers who can be squeezed out of the business easily through price competition. But once the weight of these ‘marginal’ producers has fallen sufficiently, capitalists’ investment gets tethered, in the absence of any exogenous stimuli (on which more later), to the expected growth of the market, a fact that can be expressed through a multitude of specific investment functions.

But, again in the absence of exogenous demand-sources, the growth of the market itself, upon which alone can expectations about the future growth of the market be based, depends upon nothing else but the tempo of investment (via the multiplier). It follows, then, that investment fuels itself; or growth on the basis of endogenous stimuli occurs on the basis of past experience of growth. But exactly by the same token, if there is a decline in growth, a slackening in the tempo of accumulation, then this slackening itself becomes self-reinforcing, and the economy keeps going downhill. No positive trend, therefore, can be a stable trend. On the other hand, if the economy is in a stationary state, or in a state of simple reproduction, then this state also tends to be self-perpetuating. And if, per chance, the economy is disturbed from this stationary trend, then the self-reinforcing nature of accumulation only produces cyclical fluctuations (where the boom may come to an end through either demand-side or supply-side constraints), but no positive trend.

It is not, therefore, a question of some specific investment function giving us the conclusion about the inadequacy of endogenous stimuli; it follows on the basis of any investment function that takes due cognizance of the role of the expected growth of the market (whether this is expressed as expected profits, or expected sales, or in some other way) in the determination of investment by a capitalist firm. If investment is determined on the basis of the expected growth of the market, and if the actual aggregate demand, on the basis of which expectations are formed, is not boosted by any external source and is determined exclusively by capitalists’ aggregate investment (via the multiplier), then the economy’s only stable trend is a stationary trend, around which it may experience cyclical fluctuations. If we have to explain sustained growth then we have to turn to exogenous stimuli.

3 The role of innovations

The exogenous stimulus that has figured most prominently in the economic literature is ‘innovations’ in the widest Schumpeterian (1939) sense. Kalecki (1968) explains the manner in which innovations introduce an external stimulus as follows. When an innovation becomes available, the firm that is the first to introduce it believes that it can steal a march over its rivals. It therefore undertakes some additional investment, over and above what it would have done anyway, in response to the endogenous stimuli (as part, for instance, of the multiplier-accelerator process). Since all firms think this way, all of them (or at least several of them that have access to the innovation and to the requisite finance) undertake this additional investment. The net result is a larger investment, and hence a larger size of the market, which retrospectively justifies each firm’s belief that it could sell more by introducing the innovation than it would have done otherwise.

If innovations appear in a steady stream, then in each period there is an additional amount of aggregate investment undertaken (both gross as well as net); if the amount of innovation-caused investment in each period is linked, say, to the size of the capital stock, then we have a steady positive trend arising on account of innovations as an external stimulus. Thus, for innovations to generate a positive trend, they must appear in a steady stream and cause an amount of investment that is linked to the size of the economy, e.g. its capital stock. (In Schumpeter’s model, where innovations do not appear in a steady stream and do not necessarily cause an amount of investment linked to the economy’s capital stock, they do not give rise to a positive trend. Schumpeter obtained a positive trend only by assuming full employment to be the equilibrium state of the economy, i.e. by ignoring aggregate demand problems. But if we recognize the problem of aggregate demand, then innovations as visualized by Schumpeter could well cause cycles around a stationary output trend, with employment declining secularly (if labour productivity rises owing to innovations), even when the share of wages in output remains unchanged).¹

The argument for innovations constituting an exogenous stimulus is, however, by no means convincing. If a firm (considering additional investment because it plans to introduce an innovation) expects retaliation from its rivals (whether or not they also introduce the innovation), then it will not undertake the additional investment. It would then believe that such additional investment will either lie idle, or cause a price-war to the detriment of all (including itself) in the event of its attempting to outcompete its rivals to sell more, on the basis of its lower costs owing to the innovation. Thus, whether innovations actually cause additional investment over and above what would otherwise have occurred depends upon whether firms expect retaliation from rivals, i.e. on the elasticity of their ‘imagined demand curve’ (which takes rivals’ responses into account) for downward price movements from the existing state. If this curve is inelastic, as in the standard ‘kinked demand curve’ perception, then innovations will cause no additional investment.

This elasticity in turn, however, depends upon the ‘times’. In a boom, the elasticity of the ‘imagined demand curve’ is likely to be greater than in a slump, in which case innovations may cause additional investment, over and above what would otherwise have occurred (in a boom, but not in a slump). If this is so, then innovations cease to be an exogenous factor. They are likely to cause more and more investment when the economy...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of illustrations
• Notes on contributors
• Acknowledgements
• Introduction
• 1. Finance and growth under capitalism
• 2. The global financial crisis: lessons we should have learned and an agenda for reform
• 3. The problem of power in finance in India and Brazil: from targets of opportunity to poles of self-reinforcing growth?
• 4. The social impact of globalization
• 5. Financialization, labour market flexibility and global crisis: a Marxist perspective
• 6. The evolution of income distribution in semi-industrialized economies of Latin America: assessment in terms of economic theories
• 7. A methodological agenda for new economic thinking
• 8. Rethinking the falling rate of profit and the crisis of capitalism
• 9. Comparative advantage, industrial policy and the World Bank: back to first principles
• 10. Development in a time of financial crisis: how good is the bad news? Re-orienting macroeconomic policies
• 11. Globalisation and the labour movement: challenges and responses
• Appendix 1
• Appendix 2
• Index