[India] Prabhat Patnaik: The Crisis of Neoliberal Capitalism
I. The "De-segmentation" of the World Economy
First, let me situate neoliberal capitalism within the entire history of capitalism. Throughout the history of capitalism, labor from the "Global South" has never been allowed to migrate freely to the "Global North," and this remains the case today. During the "long 19th century" [1] (which lasted until the First World War), massive migration movements occurred within the "Global North." These migrants, moving as indentured laborers or "coolies," traveled from Europe to white-settled temperate regions such as Canada, the United States, Australia, and New Zealand. Simultaneously, massive migration movements also emerged in the "Global South," with some migrants moving from India and China to tropical and subtropical regions across the West Indies, Fiji, Mauritius, East Africa, and the Pacific. However, none of the aforementioned migrations were from the "South" to the "North." According to Arthur Lewis's estimates, each of these massive migratory waves totaled approximately 50 million people.
At the same time, although "Global North" capital was legally free to migrate to the "Global South," historically, it did not invest in other sectors of the "Global South" except for mines, plantations, and other activities that supported the colonial pattern of the international division of labor. It never established manufacturing units in the "Global South," nor did it utilize the latter’s low-wage advantage—which was itself the result of the massive labor reserves created by the "de-industrialization" of the "South" by exports from the industrialized "Global North"—to meet world demand. For example, by the time of the First World War, the entire Indian subcontinent, Britain's largest colonial region, held only about 10% of foreign direct investment, and these investments were primarily concentrated in primary commodity production and activities serving global trade. Capital flows occurred mainly within the "North," complementing labor mobility. Even after World War II, when "import-substitution industrialization" spread across the "Global South" behind protectionist barriers, foreign direct investment flowing from the "North" was intended only to satisfy local markets through "tariff jumping," rather than for export to the world market (with some later exceptions in East Asia).
The unwillingness of "North" capital to shift toward the "South" puzzled development economists and sparked various explanations ranging from climate to race. Beyond this reluctance to relocate to the "South," "North" capital also systematically prevented goods produced by "South" capital from being sold in "North" markets through protective measures and both explicit and implicit discrimination exercised by "Northern" groups distributed across the "Global South" against emerging local capital. Essentially, this meant that within the context of the migration restrictions mentioned earlier, the world economy was effectively "segmented."
This "segmentation" was characterized by the fact that real wages in the "South" and the "North" could continue to diverge. Due to the persistent existence of massive labor reserves, real wages in the "South" were more or less pegged to subsistence levels (the Lewis model [2] captures this in a stylized manner), while real wages in the "North" grew along with increases in labor productivity. In fact, the dualistic opposition between the world's developed and developing countries was a clear manifestation of this "segmentation." The rise in "North" wages not only restrained the degree of local income inequality, becoming a significant factor in the stability of capitalist society, but also expanded the domestic markets of the "North," thereby helping to avoid the potential distress caused by the ex ante tendency [3] of overproduction.
Currently, globalization dominated by neoliberal capitalism has broken this phenomenon of "segmentation." Although the movement of labor from the "South" to the "North" remains restricted, capital is now more willing to shift its production facilities from the "North" to the "South" to utilize the latter's lower real wages to satisfy global demand—something that never happened historically. However, the mobility of capital also includes the mobility of finance capital, which has far-reaching effects.
One might assume that current globalization—resulting in the relatively unrestricted cross-border movement of goods and services as well as capital, including finance—has brought about a historically unprecedented "de-segmentation" of the world economy and will overcome the dualism between developed and developing countries. However, as the author points out below, this is not the case. Currently, the dualism between developed and developing countries has not ended; rather, the dividing line of this opposition has now shifted inside the countries previously regarded as part of the developing world.
II. Phenomena Related to Current Globalization
The relatively unrestricted cross-border movement of goods and capital has triggered several distinct phenomena, only four of which will be discussed in this article. First, the "de-segmentation" of the world economy brought about by neoliberal capitalism has made the real wages of workers in developed countries subject to the influence of the massive labor reserves in the "South." The "segmentation" of the world economy precisely negated this; its "de-segmentation" does the opposite. The ability of unions in the "North" to force wage increases is neutralized by the threat that once "North" wages rise, capital will shift to the lower-wage "South." It is therefore not surprising that Joseph Stiglitz found that the average real wage for male workers in the United States in 2011 was slightly lower than in 1968.
Although the threat of migration to the "South" with its massive labor reserves has suppressed wages in the "North," these labor reserves themselves have not been exhausted by this migration (and its secondary effects). On the contrary, the relative size of the "South" labor reserve has actually increased.
The second phenomenon involves the fact that the relative ease of cross-border movement of goods and services has led to more intense competition between countries. It forces every country to introduce technological change and structural optimization into its production structures without restriction to remain competitive and avoid its markets being taken over by imports. This stands in sharp contrast to the earlier period of the interventionist economy [4], when such changes were strictly controlled.
Structural optimization and technological change in "Global South" countries usually require the adoption of processes and products already introduced in "North" countries. Simply put, through these changes, the growth rate of labor productivity has accelerated compared to the earlier interventionist economy period. This means that for any given GDP growth rate, the employment growth rate under the influence of neoliberalism (i.e., the difference between the GDP growth rate and the labor productivity growth rate) is lower than during the interventionist economy period. Even if the GDP growth rate is faster than in the interventionist period, the speed of labor productivity growth may be even faster, to the point that the employment growth rate actually declines relative to before.
In fact, the employment growth rate of capitalist societies under the influence of neoliberalism might not only be lower than before but could even be lower than the growth rate of the labor force. However, in this case, the growth rate of the latter is itself underestimated in official statistics. Due to the lack of job positions, many workers become more reluctant to seek work—a phenomenon known as the "discouraged worker effect."
This scenario is not only logically possible but has, in fact, manifested in several countries of the "Global South." Taking India as an example, although according to official data, India's GDP growth rate nearly doubled from the interventionist economy period to the period of neoliberal policies—rising from around 4% annually in the early years to an average of about 7% between 1991 and the eve of the COVID-19 pandemic—the rate of job creation during the neoliberal policy period halved from around 2% annually in the early period to about 1%. Since the growth rate of the population and the working-age population exceeded 1% annually prior to COVID-19, the rate of job creation was lower than the growth rate of the working-age population even during the heyday of neoliberalism. This caused the relative size of the labor reserve to increase.
However, at least until 2019–2020, this growth did not manifest as a rise in the unemployment rate. This is mainly due to two reasons: first, the "discouraged worker effect" led to a decline in the labor force participation rate; second, a fixed amount of work was distributed among a larger number of workers. This indicates that an increase in the proportion of the labor reserve within the working-age population does not necessarily mean an increase in the proportion of the unemployed population, but rather an increase in the average proportion of time spent unemployed per person. This point is not reflected in any standard indicators for measuring unemployment rates.
The relative decrease in full-time permanent jobs and the relative increase in the number of casual and contract workers have facilitated this trend of distributing a certain amount of work among more people.
In this regard, India is by no means an exception. The factors at play in the Indian case exist to a greater or lesser degree throughout the "Global South." Although India is a "success story" in terms of GDP growth and does not have a population growth rate higher than the "Global South" average, it has witnessed an increase in the relative size of its labor reserve. Facts show that this relative growth of the labor reserve is a characteristic of the "Global South" under the neoliberal regime; it does not necessarily lead to an increase in the open unemployment rate, but instead manifests as an increase in the average unemployed labor time for each worker.
The increase in the relative size of the labor reserve has also reduced the bargaining power of a small segment of workers (i.e., organized, permanent workers), such that their real wages likewise failed to see any significant increase. Therefore, the ultimate result of the increase in the relative size of the labor reserve is a decline in the real income per capita of the entire working-age population in non-self-employed categories, which has become a hallmark of the neoliberal economy. A similar situation has occurred for the self-employed, but to understand the reasons for this, we must also note two other phenomena related to neoliberalism—namely, the third and fourth phenomena to be mentioned next.
The third phenomenon is that under the influence of neoliberalism, although each country remains a nation-state, it now faces globalized capital, particularly globalized finance capital. This fact weakens the autonomy of the nation-state: if a particular country implements policies hostile to globalized finance capital, then finance capital will collectively exit that country, very likely precipitating a crisis there. This is why national policies now tend to appease finance capital within globalization, a phenomenon usually euphemistically called "maintaining investor confidence."
This has profound political implications, especially for democracy. Democracy should mean the sovereignty of the people, but under the system of neoliberal capitalism, the sovereignty of the people is replaced by globalized financial sovereignty fused with the domestic big bourgeoisie. For example, as long as a country remains trapped in the vortex of globalized financial flows, a change of government through the electoral process will bring about almost no change in economic policy.
A fourth phenomenon also arises from this. National policies usually claim to look after the interests of all strata of the populace. Some "Global South" countries indeed did so during the post-colonial stage of interventionist economic development prior to the implementation of neoliberal policies. But they are now primarily dedicated to promoting the interests of global capital and the domestic financial oligarchy fused with it. This shift in policy requires the state to withdraw support for the domestic small-production sector, particularly small-peasant agriculture, which will gradually weaken their profitability and viability.
The aforementioned policies manifest in various forms. Due to the need to control fiscal deficits in accordance with the requirements of globalized finance, the state’s "land-augmenting" investment (such as investment in irrigation) has decreased. in most parts of the "Global South," only the state can purposefully undertake "land-augmenting" investment; therefore, the decline in such investment has caused agricultural growth rates to fall even to levels where per capita output of the agricultural population has stopped growing.
The reduction in the supply of input subsidies for agriculture helps decrease fiscal deficits in accordance with the will of globalized finance capital but also lowers agricultural profitability. This reduction in subsidies also includes cutting credit lines for subsidized institutions, forcing people to borrow once more from private usurers—from whose shackles they had largely been liberated under the previous interventionist economic system.
Market intervention measures are unable to effectively prevent price collapses. By removing quantitative trade restrictions under World Trade Organization rules and lowering import tariff rates on agricultural products (actual tariffs are even lower than the boundaries allowed by the WTO), domestic markets have also been subjected to the volatility of world market prices.
Currently, under the influence of neoliberal policies, in parts of—
In "Global South" countries, peasants no longer deal with government agencies but instead directly interface with multinational agribusinesses, purchasing seeds and fertilizers from them and selling their products to them. All these changes have deepened the poverty of the peasantry, and distressed peasants are forced to pour into the cities in large numbers to find work.
Another factor has played a similar role: under the impact of neoliberal policies, the state has withdrawn from its role as a provider of basic services such as education and health, leading to the increasing privatization of these services, which have become more expensive. This has raised the cost of living for peasants and small producers, even though this is not reflected in official cost-of-living indices. This factor has significantly increased the indebtedness of the peasantry. A definite conclusion that can be drawn is that, in terms of the decline in real per capita income of the working-age population among the self-employed category in the "Global South," the crisis of small-scale agriculture and small producers in general is an essential feature of neoliberalism, even during its developmental heyday.
It is evident that the self-employed and the non-self-employed are in similar straits; real per capita income for both groups is declining. Therefore, if the working population is taken as a whole—that is, workers, peasants, small producers, agricultural laborers, artisans, fishermen, and all those who do not live off the surplus—then the real per capita income of the working-age population belonging to this group is declining. If one assumes that the proportion of the working-age population relative to the total population of this group does not change significantly, then under the neoliberal system, the real per capita income of the working population will decline over time.
III. Basic Tendencies of Neoliberal Capitalism
The fundamental characteristic of neoliberal capitalism leading to a decline in the real per capita income of the working population involves two basic tendencies. First, income inequality within each country is intensifying. In "Global North" countries, despite increases in labor productivity, real wages for workers have not only failed to grow in tandem but have nearly stagnated due to the global mobility of productive capital (as distinct from finance capital). In "Global South" countries, even if the per capita labor productivity of the working population has increased, this is only reflected as an increase in the overall real per capita income of the nation; the real per capita income of the working population has not increased.
The result is that the proportion of the surplus in total output has increased within each country. The rise of this share within individual nations also means its share in world output has risen. The intensifying inequality pointed out by Thomas Piketty and others is precisely the result of this factor. A second tendency arises from this. On average, the consumption deducted from a unit of income by the working population is higher than that of those who earn the surplus; therefore, the ever-growing share of the surplus in world output produces overproduction in the world economy for any given investment time profile. An increase in investment cannot offset this tendency, because investment is induced by the growth of aggregate demand and is not an autonomous phenomenon that adjusts spontaneously to avoid a deficiency in demand.
However, according to Keynesian theory, overproduction can be limited through state action. Paul Baran and Paul Sweezy [5] argued that such state action occurred in the United States during the 1950s and 1960s. But two obstacles exist to such action. First, because we have only nation-states and no world-state, any such state action must either be implemented through coordination between several major nation-states, as suggested by Keynes and a group of German trade unionists in the 1930s; or be undertaken by the United States—the "leader" of the capitalist world—acting as a proxy for a world-state; or be taken by individual nation-states acting separately within their own economic systems to stimulate demand, output, and employment.
Thus, the first obstacle preventing states from taking action to stimulate aggregate demand to avoid overproduction is organizational and coordinative. Coordinated fiscal stimulus is difficult to organize, which is why there has not been much talk of it until now. In a world where the cross-border flow of goods and services is relatively unrestricted, a fiscal stimulus in the United States would face the risk that its demand-creating effects would, to some extent, "leak" abroad. In this way, while creating jobs abroad, the United States would also increase its foreign debt. This is unacceptable to it.
The situation is exactly the same for any country providing fiscal stimulus to boost aggregate demand. Moreover, unlike the United States, such a country might not even be able to obtain the necessary foreign credit, which is an additional difficulty. Therefore, any country taking such stimulus measures alone is always at a disadvantage unless it appropriately protects its own economy. Consequently, under the influence of unaltered neoliberalism, no single nation-state will undertake fiscal expansion on its own.
Furthermore, there is a second, even more powerful additional deterrent. Even if, through appropriate protective measures, the multiplier effect of expanded state expenditure could be confined to the nation itself, state expenditure would only have a significant expansionary effect on the economy if it were funded by taxing capitalists (or the wealthy in general) or through fiscal deficits. Since the working population consumes more or less all of its income, taxing them and using the proceeds for expenditure causes almost no net increase in the level of aggregate demand; it only changes the composition of demand—namely, from worker consumption to government spending. However, if government spending is funded not from any additional taxes but from a fiscal deficit, then even as government demand increases, individual demand does not decrease. Similarly, if government spending is raised by taxing capitalists or the wealthy in general (those who would otherwise save a portion of their income), such spending results in a net increase in aggregate demand.
However, both these methods of financing meet the opposition of globalized finance capital; and since financial decrees are directed at nation-states, under the influence of neoliberal policies, no individual nation-state (with the possible exception of the United States, whose currency is considered "perfectly safe" so it need not worry about capital flight) can overcome overproduction by stimulating aggregate demand. The financial industry's opposition to increasing taxes on the wealthy is easy to understand, as financiers themselves are among the richest people; but its opposition to expanding fiscal deficits even in the face of insufficient aggregate demand is less easily understood.
As can be seen from legislation enacted in almost all Western countries, with the exception of the United States, these countries, under fiscal pressure, limit their fiscal deficits to around 3% of GDP. Perhaps the reason the financial industry opposes government intervention through deficit-financed spending is that such stimulus delegitimizes the social role of the capitalist, inevitably raising the question: "If the government must create jobs, why do we need the existence of capitalists?" For those capitalists whom Keynes called "functionless investors" (i.e., financiers), this delegitimation is particularly severe.
As previously mentioned, the United States may be an exception because it is not shackled by globalized finance, and its currency is regarded as "perfectly safe" by the world's wealth-holders. From the current situation, the possibility of capital flight from the United States seems unlikely. But the United States is limited by organizational and coordinative factors, and the result is that under neoliberal capitalism, there is almost no state intervention that directly stimulates demand through fiscal means. This has led countries to adopt two other approaches: one is to provide subsidies and transfer payments to capitalists to encourage them to increase spending as a means of stimulating the economy; the other is to rely on monetary policy as the primary means of boosting the economy.
In fact, the first measure, rather than stimulating the economy, may prove counterproductive. This is because, due to fiscal opposition, the government cannot raise the funds transferred to capitalists by increasing the fiscal deficit, but must instead raise them by reducing other areas of state expenditure or at the expense of the working population. However, because the funds transferred to capitalists are not entirely spent—a portion is saved (the increase in capitalist investment is based only on a prior expansion of market size, not because capitalists have more available resources through such transfers)—any of the above methods of financing such transfers leads to a contraction in the level of aggregate demand. Therefore, this method of stimulating the economy backfires.
As for monetary policy, it is well known to be a blunt instrument for stimulating the economy. Although the Federal Reserve maintained low interest rates near zero for quite a long time, the stagnation of development in the "Global North" did not change; thus, the term "secular stagnation" began to gain popularity. In fact, maintaining near-zero interest rates for a long time could also have counterproductive effects if it leads to a rise in the profit margins managed by monopoly capitalists, as the illiquidity risks usually associated with such moves are reduced. This, it can be said, is precisely what caused the current inflation in the "Global North."
One might ask: if "secular stagnation" is the result of overproduction inherent in neoliberal capitalism, why did it not manifest earlier? Why did it only appear about ten years before the COVID-19 pandemic? The answer lies in the fact that, although state intervention against this tendency was futile under neoliberal capitalism, what could and actually did counteract it was the formation of asset price "bubbles." Despite their speculative nature, these "bubbles" can act as a stimulus to the real economy.
The dot-com "bubble" in the US in the 1990s and the housing "bubble" at the beginning of this century both suppressed the tendency toward overproduction. But after the housing "bubble" burst, no similar "bubble" formed; even maintaining near-zero interest rates did not create an asset price "bubble." On the contrary, as mentioned, it may have stimulated current inflation through a rise in managed profit margins.
Since it was impossible to manufacture a new "bubble," and since the bursting of a bubble makes economic agents more cautious about speculative behavior, no other bubble of comparable size appeared after the housing bubble burst. Instead, it plunged the "Global North," and subsequently the world economy, into secular stagnation, thereby exposing the inherent tendency toward overproduction under neoliberal capitalism.
When such secular stagnation occurs, in addition to the growing labor reserve relative to the working-age population caused by the reasons mentioned above, another generation of unemployed is generated by the stagnation itself. In other words, during the growth phase of neoliberal capitalism (even when global economic growth was driven by asset price "bubbles" in the US), technological and structural unemployment expanded the proportion of the labor reserve within the working-age population; whereas the end of economic growth or stagnation also triggers additional unemployment of the Keynesian type. India's economic stagnation began shortly after the bursting of the US housing market "bubble," a phenomenon that includes not only the previously existing increase in the relative labor reserve but also an increase in the unemployment rate. Prior to this, India had already been facing a trend of an increasing relative labor reserve and a decline in the per capita employment rate.
IV. The Emergence of Fascism
It is against this backdrop of crisis and mass unemployment, with no signs of change in sight, that fascist tendencies have begun to emerge. Many countries, such as Italy, Poland, Hungary, India, and Turkey, already have fascist tendencies. In other countries, such as France and Germany, the numbers of such movements have also reached alarming levels.
Fascist or quasi-fascist organizations exist in all capitalist societies but are usually on the periphery. They come into focus when monopoly capital provides them with financial and media support. This usually occurs during periods of crisis when the social dominance of monopoly capital is threatened. In such cases, fascist organizations are of use to monopoly capital because they provide a powerful, diversionary rhetoric that reduces public discussion of the crisis and systemic failures. At the same time, fascist organizations incite hatred among the majority against certain unfortunate ethnic or religious minorities, portraying them as the "Other" and holding them responsible for past and present hostile acts against the majority. In addition to being diversionary, this rhetoric divides the working class, making it more difficult for them to unite and challenge the existing system.
The widespread phenomenon of large-scale unemployment in society also allows fascist organizations to easily recruit new members for their movements. By utilizing the state apparatus and employing the street hooliganism of thugs for repression, fascist organizations gain political control over society, thereby serving monopoly capital. Michał Kalecki argued that the state machinery under fascist rule in the 1930s was "under the direct control of a partnership of big business with fascist upstarts." [6] Contemporary fascism (more appropriately termed "neofascism") signifies an alliance between domestic corporate oligarchies integrated with globalized capital and fascist organizations.
However, the fascism of the 1930s differs significantly from today's neofascism. The former combined state terror with street terror to ruthlessly suppress all political opposition and worker resistance, while promoting the expansion of the interests of monopoly capital (though among monopoly capital, the fascists particularly favored the newly emerged segments of the monopoly capitalist class). It overcame the Great Depression by substantially increasing military expenditures. These expenditures were primarily financed through government borrowing and were aimed at war preparation. Fascist regimes were able to achieve this because the state could dissolve the anxieties of the financial community regarding increased fiscal deficits, as finance itself was primarily national rather than globalized. In today's era of financial globalization, no nation-state—not even a fascist one—has the power to persuade finance capital to accept larger fiscal deficits. On the contrary, even a fascist nation-state must accept the dictates of globalized finance capital to avoid expanding fiscal deficits or imposing heavier taxes on the wealthy. It follows that even a fascist state cannot stimulate the economy by increasing spending.
In other words, even fascist states face the same constraints as liberal bourgeois states: they cannot increase government spending to raise aggregate demand. This sole viable path has been blocked by the hegemony of globalized finance, which finds such methods distasteful. In short, contemporary fascism cannot overcome the crisis in the way that 1930s fascism did. To draw attention to this contextual difference, we prefer to use the term "neofascism" to denote the contemporary phenomenon. Therefore, monopoly capital's support for neofascism today stems from its repressive and diversionary nature, rather than from any capacity to overcome the current crisis. Neofascism serves neoliberalism; it helps maintain the neoliberal order. Since the crisis of neoliberalism cannot be resolved within the neoliberal order, it is impossible for neofascism to overcome this crisis.
IV. Conclusion
To overcome the crisis, one must transcend neoliberalism. There is a view that we have already moved beyond the original form of neoliberalism and that the world is no longer dominated by the "Washington Consensus." [7] But this movement away from original neoliberalism has two main characteristics: first, it involves the introduction of trade controls rather than capital controls, especially controls over the movement of money; second, while such trade controls have been introduced by the United States and some other "Global North" countries, they have not appeared in the "Global South."
In summary, no "Global South" country can pursue expansionary fiscal policies for the two reasons mentioned above, as they are constrained by the globalized financial system. Even if they were to implement expansionary fiscal policies, the effects would likely "spill over" abroad. Protectionism in the "North" may stimulate recovery in the "North" to some extent (although such a recovery requires the support of expansionary fiscal policies to be sustained), but this offers little consolation to "Global South" countries. Unless they can transcend the neoliberal regime, implement controls on financial flows, and adopt complementary measures such as trade controls, they are destined to remain trapped in the crisis.
If the "Global North" escapes the neoliberal regime by introducing protectionism while the "Global South" remains trapped within it, the economic situation of the latter will deteriorate further. Faced with protectionism from the "North," the "South" can neither retaliate nor pursue expansionary fiscal policies; this destines them to immediately become victims of the "North's" "beggar-thy-neighbor" attacks. In the medium to long term, this asymmetric response to the crisis between the "North" and the "South" will hinder or even reverse the transfer of economic activity from the "North" to the "South," thereby eliminating the primary growth stimulus for Southern countries.
Neoliberalism has reached a dead end. The sooner the world recognizes this fact, the better—especially for the countries of the "Global South." But for these countries, breaking away from the neoliberal system by introducing capital controls and corresponding trade controls has become particularly difficult, as the neoliberal crisis has burdened them with unsustainable foreign debt. The "bailout packages" negotiated by "Global South" countries thus far have come with "strings attached," making it even harder to escape the crisis. Therefore, it is ironic that while the crisis compels them to break away from the neoliberal regime, the effects of the crisis itself make such an escape more difficult.