Prabhat Patnaik explains how the colonial system led to depression. Then, in advanced countries governments stepped in to increase demand and productivity, but how unless the periphery is available for extraction of wealth and cheap provision of inputs the system would collapse. So, the Global South was absorbed by a globalization process where finance becomes predominant, income deflation is widespread and governments everywhere are turned into servants of financialization.

August 2021 Produced by Lynn Fries / GPEnewsdocs

Imperialism which existed in the colonial era persists to this day and the system cannot do without it. In a 3 Part series, Prabhat Patnaik discusses his read on the history of capitalism from colonialism into the present. As per Chapter 6 (Periods in Capitalism) of Capital & Imperialism: The periodization we follow is: (1) Colonialism prior to the First World War; (2) the interwar years; (3) the post-Second World War years of the ‘Golden Age of Capitalism’; (4) the era of globalization; and (5) the current conjuncture, which marks the dead end of globalization.


LYNN FRIES: Hello and welcome. I’m Lynn Fries producer of Global Political Economy or GPEnewsdocs. This is Part 2 of a conversation with Prabhat Patnaik. He is talking about his read on the history of capitalism that he breaks up into 5 periods from colonialism into the present. And how imperialism which existed in the colonial era persists to this day and the system cannot do without it. Topics sourced from a new book Capital and Imperialism: Theory, History, and the Present authored by Prabhat Patnaik and Utsa Patnaik.

A world renowned economist, Prabhat Patnaik is Professor Emeritus at the Centre for Economic Studies and Planning at Jawaharlal Nehru University in New Delhi. Some of his earlier books include Accumulation and Stability Under Capitalism, The Value of Money and Re-Envisioning Socialism. Welcome, Prabhat. Thank you for joining us.

PRABHAT PATNAIK: Thank you. Thank you, very much.

FRIES: Prabhat, in Part 1 you commented on colonialism before the First World War as the first of five periods in your analysis of the history of capitalism. Let’s pick it up where we left off with the exhaustion and collapse of the colonial arrangement and from there the 2nd period in your history of capitalism, the Interwar years. So first, comment on the collapse of the colonial relationship.

PATNAIK: Well, this relationship can no longer be sustained because the market role of the colonies really cannot be sustained. In other words, the de-industrialization reaches a limit. When craft production had been virtually eliminated, local craft production had been virtually eliminated in the colonies, then you cannot really expand any further sales to these colonies. Because their incomes were not growing.

Because the surpluses that they generated were not being domestically invested. Were not being invested for instance, by the peasants. Because the peasants were paying these heavy taxes. These surpluses were partly, of course, being locally consumed by the [inaud], the landlords and the local rich but partly also being taken out by the colonial power and then used for the diffusion of capitalism elsewhere.

The diffusion of capitalism into the temperate regions was actually sustained and nourished by the drain of the surplus, draining away of t he surplus from the colonies. Now that draining away of the surplus from the colonies is a role that continues through the Interwar period. But on the other hand, the market role was something that really ceases to be important anymore.

And what is more Japan emerges as a big competitor of Britain. And therefore makes encroachments into Britain’s Asian colonies by selling goods at the expense of Britain in these colonial markets. And therefore you find that Britain can no longer sustain its position within the gold standard. It cannot sustain the gold standard itself.

And therefore you have the uncertainties of the Interwar period. And you havethe Great Depression. The Great Depression takes place because there is a shortage ofmarkets for the goods that are produced in the metropolis. It is an overproduction crisis. And that overproduction crisis gave rise to mass unemployment in the capitalist countries.

 FRIES: Give us an idea of how this read of the Great Depression in the Interwar years differs from the mainstream views.

PATNAIK: If you look at the writing of the best known economic historian who has written on the Great Depression that is Charles Kindleberger. Charles Kindleberger’s explanation of the Depression is that Britain could not sustain its leadership role. I mean, he argued that capitalism as an international system requires a leader. And [he argued] that Britain could not sustainits role as a leader while the United States was not yet in a positionor unwilling to assume the role as that leader.

But why couldn’t Britain sustain its role as a leader? Britain’s role as the leader of the international system characterized as a whole by the gold standard was because of the colonial arrangement. When you go into why Britain could not sustain its role as the leader, the answer lies in the collapse of the colonial arrangement. When the possibility of the colonial arrangement to play the role that it was doing before for reasons that I mentioned that it can no longer play that kind of role. So while Kindleberger looks at phenomena correctly but he doesn’t go into an explanation of these phenomena which are rooted in the relationship between the metropolis and colonies.

FRIES: You define imperialism as this relationship between capitalism and its setting. So in this period, the regime imposed under colonialism. So after the exhaustion of the colonial arrangement and then the Interwar years, you see the post Second World War years the so-called “Golden Age” of capitalism as demarcating a 3rd period in your read of the history of capitalism. And so, a new regime in capitalism’s relationship with its setting. So tell us about that.  

PATNAIK: Well, in the Interwar years itself, Keynes came up with the idea that the State could play the role which earlier (Keynes didn’t say colonialism) but Keynesargued the State could play the role of providing a market. You see colonialism, according to the British economic historian S. B. SauI, is something which provided a “market on tap”. Like you can open and close the tab. You could actually open and close the amount you could sell to the colonies.

That actually, that the State could provide such a market. You know, Kalecki defined sales to the State as an export surplus from the capitalist sector to the State. When the State actually uses a fiscal deficit to buy these goods, it is as if the capitalist sector is making an export to the State. Even when the State doesn’t use a fiscal deficit [to buy these goods] with State taxes nonetheless (even with a balanced budget) there is a certain amount of sales that can be made to the State.

And therefore, Keynes had already suggested that the State could provide a market so that capitalism doesn’t have to be afflicted with mass unemployment. When Keynes made this suggestion nobody took this very seriously. I mean, you know, everybody said, yes, he’s a very well know economist and all that but his ideas, certainly in Britain, were not taken very seriously at that time.

In the post Second World War period, capitalism moves to Keynesian what we call demand management. Namely that the State comes in in a very big way, both in the United States and in Europe, as a market for capitalist products. State expenditure increases the proportion of GDP. And therefore the State provides a substantial market and therefore the overproduction crisis is overcome.

And when it is overcome [the overproduction crisis] capitalism experiences very low levels of unemployment, high levels of aggregate demand because of which there is high levels of accumulation, investment growth. And because there is high level of growth, there’s also high level of labor productivity.

What is more some of the labor productivity increasing innovations which were not introduced during the Depression periodof the Interwar years are now introduced because there is a boom going. And because of that there is a substantial increase in labor productivity. And because unemployment is low, worker’s bargaining strength is high. Trade unions are strong. They bid away substantially the increases of labor productivity in the form of higher wages. So the workers’ standard of living increases.

And in Europe, the government expenditure additionally takes the form ofsocial welfare expenditures. Which again, also benefits the workers. So the workers generally are benefited by this growth which is why is it named the “Golden Age” of capitalism. Low unemployment, high rates of increase in real wages and welfare payments of various kinds. So this is the “Golden Age” of capitalism. This “Golden Age” was made possible through State intervention in demand management.

But in this third period, while the State provides the “market ” the other aspect of colonialism which was that the metropolis could obtain at non-increasing prices a whole variety of raw materials as it expanded its output and so on that role does not get fulfilled during this period.

So there is noway of acquiring raw materials at will from the market because of the fact that these colonies have now become politically independent. They can no longer be taxed either like in the old days by the colonial state. And therefore there is no mechanism for actually extracting these resources from them.

So the “Golden Age” period fulfills one role of colonialism but not the other role. That other role not being fulfilled does not immediately create a problem for capitalism. We explained why. But it does ultimately create a problem which is what brings the “Golden Age” to an end. It creates a problem of inflation.

Now by the end of the 1960s and the beginning of the 1970s, there is a massive inflation that actually capitalist countries suffer, all the advanced capitalist countries suffer. And that is what makes the “Golden Age” unsustainable. And there is now a tendency to, particularly during this period when finance has grown, there is a tendency to bring the “Golden Age” to an end. There’s pressure to have a new regime which is the neoliberal regime.

FRIES: So capitalism needed a new relationship with its setting as one of two basic needs was not being met. The regime in the Golden Age had no mechanism to ensure as you say that the metropolis could obtain at non- increasing prices a whole variety of raw materials as the capitalist system expanded output. Explain more about why inflation did not become a problem sooner.

PATNAIK: If you require raw materials of various kinds or food grains from the tropical regions, there are two ways you can get it. One is that the production in the region increases and you’ll take away the additional products or you buy the additional products. The other is when there is no increase in production, but you simply get your requirements by squeezing the local people that option. This is what colonialism did.

Colonialism did not give rise to an increase in the production of tropical agriculture, of the tropical primary commodities. What colonialism did was to actually squeeze local consumption in order to take away the goods that it required. And this is something which was made possible because you have political control over the colonies.

Now what happens during the “Golden Age” period is that many of these countries have also become independent. Almost all of them over a period of time became independent. When they become independent, you have new governments there. And these governments in turn actually started encouraging peasant agriculture in many, many ways. Because they were committed to doing that as a part of their anti-colonial struggles.

Therefore, even though of course the richer sections of the peasantry benefited from these government measures and so on but there was an increase in agricultural production the like of which had not been seen for fifty to a hundred years before. So you had an increase in production. Therefore the inflationary pressures were kept in check.

And what is more, we argue the different Third World countries competing against one another to push out more and more exports of primary commodities so that they can actually obtain foreign exchange to buy their requirements of industrial capital goods and so on with which they can industrialize their economies. That played a role in keeping commodity prices low. As a matter of fact, the terms of trade between manufacturing and primary commodities moved against the latter for a very long period in the post Second World War years.

FRIES: Prabhat, comment more broadly on stability in the value of money in capitalism. More specifically on what disrupts that stability and what mechanisms capitalism has to protect the value of money.

PATNAIK: Now, the stability in the value of money is something which actually gets disrupted from very many different sources. One very obvious source from which it could get disrupted is of course, if you have workers’ bargaining strength being so powerful that they demand higher money wages. Therefore they demand a higher share of output. Well the capitalists are unwilling to give that share of output.

The other is if there’s a rise in raw material prices. And the rise in raw material prices then implies that costs go up. And if the final goods prices remain unchanged then the share of profits must go down. If the capitalists are willing, that is different, but they would not be willing.

Therefore the value of money can get disrupted in these very many different ways. The mechanism that capitalism has for preventing the value of money getting disrupted because of bargaining strength of the workers, because workers demand higher money wages, which then give rise to inflation is by having a reserve of army of labor. So that their bargaining strength is nullified.

The other [way] in which the capitalist countries tried to prevent a disruption in the value of money is by ensuring, as I said, that the raw material producers…whenever there is any tendency for raw material prices to rise, there is an income deflation that can be imposed upon them [the raw material producers]. In the old days it was imposed through the colonial finance mechanism. Nowadays through the globalization of finance and austerity policies and so on. So capitalism operates in these very many different ways to ensure that the value of money does not get disrupted.

FRIES: In earlier comments late sixties/early seventies as a period when all the advanced capitalist countries suffered inflation, you said pressure built to get onto a new regime especially as that was a period when finance had grown. So bring that into the mix. Talk now about the growth of finance in that period.

PATNAIK: The whole growth of finance requires the absence of inflation.This inflation occurring in the late sixties and early seventies is something which came against the interests of the growth of finance that had occurred because finance requires price stability.

Now, the growth of finance that occurred is partly, of course, a certain natural process. You know, there is a certain automatic growth of finance that takes place in any process of growth of an economy. But additionally, there were two factors which are very important.

One factor is the continuous outpouring of dollars from the United States. Because the United States which had assumed the leadership role of the capitalist world runs a persistent current account deficit. Why does it do so? Because above all, I mean, it has actually built up a number of military bases all over the world. And it has to undertake expenditures in maintaining those military bases which are all meant to encircle the socialist countries. Which was supposed to contain the threat of socialismfrom engulfing the capitalist countries. And therefore the US as the leader of the capitalist world runs a current account deficit.

Now when it runs a current account deficit it pays under the Bretton Woods system for this current account deficit by printing dollars. You see Britain as the leader of the capitalist world before the First World War also ran a deficit vis-a-vis all the advanced capitalist countries. But Britain did not settle that deficit by printing pounds Sterling. It settled that deficit by the colonial drain that it had got because of which it got hold of colonial goods and sold it to them. And it got these colonial goods gratis.

Therefore, in some sense, the growth of finance which arises because there is this outpouring of dollars that entered into the various European banks, American banks alsoas deposits and therefore there’s a massive buildup of finance. The massive buildup of finance is also a reflection of the end of the colonial relationship, in one sense. Namely, that the leading capitalist country is no longer able to settle its deficit by taking the surplus of the colonies but has to print IOUs, print dollars.

So the US gets indebted by every time the U S prints a dollar, somebody holds a dollar. It’s an IOU of the US and therefore US gets indebted. This indebtedness didn’t arise with Britain. On the contrary, Britain was the biggest capital exporter because it had access to the colonial resources. It took away colonial resources through the [inaud], ‘’the Drain”. Now that is the second source of the enormous increase in finance.

And the third source, is that you have a rise in oil prices and because of that suddenly money shifts. Resourcesshift from the pockets of large numbers of oil consumers to the pockets of the oil sheiks. And of course they put it into the American banks. So there’s a huge concentration of resources in the hands of these banks.

So for all these reasons there is a massive increase in finance capital. And this finance capitalists sought to be invested everywhere. Theydon’t want to just hold it as money, as cash, as deposits. They would like to invest it all over the world. The Bretton Woods system had capital controls. So they get rid of the Bretton Woods system. Capital controls go. Now there’s a globalization of finance.

And that globalization of finance also implicitly serves to reduce the inflationary pressures by imposing income deflation, by imposing a squeeze of the purchasing power of the Third World countries. But this time not through taxes, not through the colonial arrangement. But because of the fact that now government expenditures have to be cut, austerity has to be imposed on these countries and so on. Because of which again, they have a squeeze on their purchasing power. Because of which the raw material prices which had increased come down. And when they come down that settles the inflationary phenomenon in the advanced capitalist countries.

FRIES: This brings us to the 4th period in your read of the history of capitalism that we will be taking up next. Just to quickly sum up so far, the first period, the colonial regime, you argue is the only period in the history of capitalism that actually fulfilled both of two basic needs of capitalism. And the exhaustion and collapse of which marks what you see as the 2nd period of capitalism, the Interwar years and the Great Depression. The regime that followed in the 3rd period in the post Second World War years, you argue fulfilled only one of capitalisms’ two basic needs. That being it played the role of providing a “market on tap” but had no mechanism to impose income deflation on the Third World. Explain more about this change in the regime from the period in the post World War II years to that of the era of globalization.

PATNAIK: You see the years of globalization are the opposite. They actually have the means of imposing income deflation. Suppose there is inflation anywhere.I mean, suppose there’s inflation in the metropolis. One way of controlling that inflation is by bringing down raw material prices. And how do you bring down raw material prices? By reducing the local absorption of these raw materials or by reducing the cost of production of these raw materials. One way you can do it is by imposing austerity on these economies that produce raw materials so that their money wages are kept down. Their local absorption is kept down and so on. And this is exactly what globalization does.

Globalization above all is something which ensures that whenever there is any inflationary pressure, the government immediately takes measures of austerity. The interest rates are increased because of which you have a reduction in demand and so on.So, the globalized regime has means of imposing income deflation on the tropical Third World countries. But it has no means for state expenditure to provide the market.

State expenditure can increase the level of demand only if either it is financed by taxing the capitalists or it is financed by a fiscal deficit. If the state taxes workers and spends; the workers would have spent that money anyway. So there’s no net increase in demand. I mean if the state takes away a hundred dollars from a worker, the worker would have spent the hundred dollars. Therefore the state taking away the hundred dollars implies a reduction of the workers demand by a hundred dollars. So if the state spends the hundred dollars, there’s no net increase in demand.

A net increase in demand arises only if the state takes away resources of the capitalists not the workers. Or if it just doesn’t take away any resources and it just has a fiscal deficit. Now, a fiscal deficit and taxing capitalists is something which is anathema as far as globalized finance capital is concerned. Obviously it would not like a tax on capitalists because after all any such tax is something which would also affect its own interests. And it also would not like a fiscal deficit.

Now that’s quite interesting why it does not like a fiscal deficit. Incidentally, all European countries have this limit on the fiscal deficit of 3%. of the GDP. Other than the United States, virtually every capitalist country in the world actually has a limit on the amount of fiscal deficit as a proportion of GDP. The EU has that limit. Every other country has that limit.

You ask yourself, why does it have a limit? We don’t have a limit of the minimum amount of health expenditure the government can undertake. We don’t have a limit on the minimum amount of education expenditure the government can undertake as a percentage of GDP. We don’t have a limit on the minimum amount of tax revenue that the government can generate as a percentage of GDP. We have this one thing.

This one thing is a limit on the magnitude of the fiscal deficit as a percentage of GDP. And that implies that the fiscal deficit cannot be expanded. Therefore there is no means of expanding demand through State intervention which is what Keynes had wanted. This basically makes the regime of globalization. That now you can impose income deflation, you can keep down inflation. But on the other, what you cannot do is to get an increase in the size of the market for metropolitan capitalism’s product.

Now, again, this regime had a certain life because even though you did not have the State playing that role, there were periodic bubbles in the United States. One was the dot-com bubble which was in the nineties. And when that collapsed, then you had the housing bubble, earlier part of this century. Because of which these bubbles temporarily give a boost to the capitalist system.

Because with the bubbles people believe that their wealth has increased. And with that, they also buy more goods and so on. There is a certain wealth effect on consumption that arises because of the bubble. There’s a wealth effect on investment that arises if the bubble is one that actuallyoccurs in the financial sector and reduces the cost of borrowing.

So you have the bubble stimulating the US economy. And the US being the biggest economy in the world economy in various ways and that keeps the globalized regime going.

But when the bubbles come to an end, for instance, after the collapse of the housing bubble, you can’t generate a bubble to your liking as you desire. And that’s why capitalism has been stuck more or less in a protracted crisis after the collapse of housing bubble.

FRIES: And this period of protracted crisis marks the 5th and current period in your read of the history of capitalism. For more background on all of this, comment on changes in the nature of the State that were ushered in during the regime of neoliberal globalization.

PATNAIK: Now we have globalized finance. And with globalized finance and the nation State, the nation State willy-nilly has to listen to the whims of globalized finance. Otherwise finance would leave your country. So, the very act of globalization of finance and a country’s economy being exposed to the globalization of finance undermines the autonomy of its State.

The State cannot do what it likes. And what is more, you have different political formations not able to provide alternatives before the people. Because all of them more or less, as long as they’re caught in this web of globalized finance have to pursue the same policies. Which are the policies that globalized finance likes.

Now, what are these policies? One, I have already mentioned. That you have an imposition of a limit on the magnitude of the fiscal deficit as a percentage of GDP. I mean,why are all countries suddenly having these fiscal limits? That’s because finance demands it. Because finance does not like fiscal deficits.

The second is that the State did a lot of things for peasant agriculture. The State purchased peasants products at assured remunerative prices. The State subsidized inputs. The State subsidized credit for peasant agriculture. The State itself undertook substantial investment in irrigation; substantial investments in research and development for promoting innovations into peasant agriculture. The State at the same time had an enormous extension service through which these innovations or these processes, new methods were disseminated among millions of peasants. So the State had done many things to support the petty production sector of peasant agriculture.

Now one of the things that globalization of finance and the fact that the nation State cannot undertake policies of its liking; one of the ways that manifests itself is of course that now the State has to withdraw support from the petty production sector and concentrate support only for the financial sector to ensure that it remains credit worthy. To ensure that it is not downgraded by the credit rating agencies; to ensure the public sector is privatized; to ensure that education and health care which are critical services provided by the State at earlier periods is something which is privatized and therefore made more expensive.

So in very many different ways now the State has to pursue policies to the liking of finance and unlike the policies it was pursuing earlier.

FRIES: Talk more about this major change in the State as it applies to the post-colonial countries of the Global South.

PATNAIK: Even though the country has been decolonized, the post-colonial government has to more or less pursue policies which are to the liking of metropolitan capital. Which are to the liking of globalized finance capital with which the domestic big monopolists are also integrated. They’re part of this globalized finance capital that moves around the world.

Even though you have an independent government, the independent government cannot pursue policies which are in the interests of the people inside the country. But they must pursue policies which are in the interests of metropolitan capital, globalized finance and domestic big monopolies. All of whom are in fact more or less inter-related.

But the kind of policies that it pursued earlier, which entail some degree of protection for workers, for instance. Which entailed some degree of support for peasant agriculture. Which entail some degree of support for petty production in these countries by which I mean handicraft production and so on. All of those policies are withdrawn.

So earlier, that means even after decolonization, the State appeared to be placed above the classes as a neutral entity, even though it may be a State defending capitalist property. But it was something that appeared to be placed above classes, which were looking after the interests of the various classes in varying degrees.

Now, what happens is that the State no longer has that kind of a neutral role. But the State is explicitly,explicitly embroiled with big capital, domestic and foreign. And explicitly doing things which go against the interests of the workers, the peasants, petty producers, fishermen, craftsmen and so on.

FRIES: We are going to break and be back with the third and concluding segment of this conversation with Prabhat Patnaik on Capital and Imperialism. Prabhat Patnaik, thank you.

PATNAIK: Thank you.

FRIES: And from Geneva, Switzerland thank you for joining us in this episode of GPEnewsdocs.

Link to Part 1 and Part 3

Prabhat Patnaik is professor emeritus at Jawaharlal Nehru University, New Delhi, Centre for Economic Studies and Planning where he taught for four decades. He was Vice-Chairman of the Kerala State Planning Board from June 2006 to July 2011. An eminent and prolific economist, his published works include numerous books such as The Value of Money, Re-Envisioning Socialism and Accumulation and Stability Under Capitalism. His most recent book, co-authored with Utsa Patnaik and published by Monthly Review Press (2021) is Capital and Imperialism: Theory, History, and the Present.

Original content in this work by Lynn Fries/GPEnewsdocs is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License. Some of the other public domain work(s) that this program incorporates may be licensed separately.

Print Friendly, PDF & Email